Ash14297

But what I meant was if you are married, and both have been a non-resident alien and a resident alien within the same tax year (dual-status) they can chose to be taxed for the full year as a resident, therefore could chose to claim the standard deductions. Whereas filing as single, you have no choice but to file as dual-status and have to itemize. I don't get that?

Michael

There is no difference since the following rule applies to both married and single.

Restrictions for Filing Dual-Status Tax Returns

You cannot use the standard deduction allowed on Form 1040, U.S. Individual Income Tax Return. However, you can itemize certain allowable deductions.

Also I was apparently was wrong. Apparently you are not taxed on foreign source income when you were not a resident.

For The Part of the Year You are a U.S. Resident Alien

For the part of the year you are a U.S. resident alien, you are taxed on income from all sources. Income from sources outside the United States is taxable if you receive it while you are a resident alien.

For The Part of The Year You are a Nonresident Alien

For the part of the year you are a nonresident alien, you are taxed on income from U.S. sources only.

Taxation of Dual-Status Aliens

Therefore since you aren't taxed on the portion of income when you weren't a resident, that is a tax break for you but since it is a tax break, the IRS is going to take away the tax break by not allowing the standard deduction. As an example, if a married couple arrived in the US on June 26th, they would be considered a resident for tax purposes and if they made $100,000 during the next 6 months and were allowed the full standard deduction plus exemptions (which are deductions and exemptions for a full year), the foreigner would be getting a very large tax break. Not only would they getting something that is supposed to be for income for a full year but they would only be taxed at marginal tax rates that of half the income that was likely made during the full year. So IRS thinks this is probably very unfair to USCs who don't get that tax break and therefore tries to take it away as fairly as possible.

As another example, if a married couple worked in the US for 183 days and made $20,000 and were given 100% of the standard deduction plus exemptions for each, they would pay $0 tax. But if they worked for the full year in the US and made $40,000, they would pay $2,048 in taxes. Would it be fair to USCs for the foreigners that probably made about $40,000 during the year to pay $0 tax and the USC that made the same amount paid $2,048 in taxes? In the eyes of the IRS, probably not so it tries to make the foreigner pay $1,024 or half of what the USC pays since that couple worked in the US for only 1/2 the year.

Some people don't qualify under the substantial presence test and file form 1040NR but the rules for 1040NR dual status are far worse than the rules for form 1040. Therefore some opt to file as a resident to get tax breaks that aren't allowed when filing as a non resident but their itemized deductions would probably be far less than someone that has been in the US for 10 months.

Anyway the first year is very complicated and trying to file the tax return yourself will be very difficult.

Ash14297

But it also mentions this:

If you are a dual-status alien, you can choose to be treated as a U.S. resident for the entire year if all of the following apply;

• You were a nonresident alien at the beginning of the year
• You are a resident alien or US citizen at the end of the year
• You are married to a U.S. Citizen or resident alien at the end of the year
• Your spouse joins you in making the choice

Doesn't that mean if you match that criteria, you can opt to be treated as a resident alien for tax purposes for the whole year, therefore, you wouldn't be filing as dual-status. If that is the case then resident aliens don't have to itemize, they can opt for the standard deduction.

Pulaski

Sorry, yes, I forgot that state income taxes are included in the itemized computation.

Michael

That is one special case where someone is married to a USC or an LPR and is immigrating to the US during the year. Normally the USC or LPR is living in the US, the foreign spouse is living in a foreign country, and the USC or LPR has to file married filing separately and pay the higher marginal tax rates on their income. In this case, they can opt to have the foreign spouse be treated as if he/she was a resident for the full year and they can file married filing jointly and use the standard deduction. However then all of the foreign spouse's income for that year will be liable for US taxes and foreign tax credits will need to be used to offset taxes owed. In some cases, the foreign spouse may be selling property, securities, or taking lump sum pension distributions during that transition year that may possibly not be taxable in the foreign country but is taxable in the US and using that option may not be the smartest thing to do tax wise. That is why both spouses have to agree when making that choice.

That is the one case that I know of where the IRS will possibly give someone a possible tax break.

Michael

You must hit the rare case. If you look under that tax calculator at the marginal tax brackets, married filing separately is half the amount of married filing jointly in every marginal tax rate which means if incomes are unbalanced, the person with the highest income will move more quickly through each marginal tax bracket so will be paying more taxes when filing separately even though the other person pays a little less taxes.

For example if the higher income is $150,000 after deductions and exemptions and filing separately, that person will pay 10% on $9,075, then 15% on income between $9,075 - $36,900, 25% between $36,900 - $74,425, then 28% between $74,425 - $113,425, and 33% between $113,425 - $150,000. If the lower income was $50,000 after deductions and exemptions, that person will pay 10% on $9,075, then 15% on income between $9,075 - $36,900, 25% between $36,900 - $50,000.

However filing married filing jointly with a combined income of $200,000 after deductions and exemptions, the couple will pay 10% on $18,150, 15% between $18,150 - $73,800, 25% between $73,800 - $148,850, and 28% between $148,850 - $200,000.

For filing separately:

Higher Income of $150,000 after deductions and exemptions:

$9,075 @ 10% = $907.50
$27,825 @ 15% = $4,173.75
$37,525 @ 25% = $9,381.25
$39,000 @ 28% = $10,920.00
$36,575 @ 33% = $12,069.75
===================
$150,000 = $37,452 Tax

Lower Income of $50,000 after deductions and exemptions:

$9,075 @ 10% = $907.50
$27,825 @ 15% = $4,173.75
$13,100 @ 25% = $3,275.00
==================
$50,000 = $8355.75 Tax

Total tax on $200,000 when filing separately = $45,807.75

Married filing jointly on $200,000 combined income after deductions and exemptions.

$18,150 @ 10% = $1,815.00
$55,560 @ 15% = $8,347.50
$75,050 @ 25% = $18,752.50
$51,150 @ 28% = $14,322.00
===================
Income $200,000 = $43,237 total tax when filing jointly

Unless each of you is filing as single (not allowed) or each of you are taking each other's deductions and exemptions (double dipping), it's pretty hard to make filing separately more beneficial.

kodokan

There's a pretty thorough analysis of this here:

At What Income Level Does The Marriage Penalty Tax Kick In? | Financial Samurai

JAJ

An inbound dual status taxpayer does file form 1040 (marked "Dual Status Return"), but only includes worldwide income incurring after the date of becoming U.S. resident. The only income that is taxable before that date is U.S. source income. An unsigned form 1040NR, with the notation "Dual Status Statement", is used to capture this income and it should normally be transferred to form 1040.

An inbound dual status tax filer would only need to use forms 2555/1116 (and 2555 would be unusual) if non-U.S. income was earned after the date of becoming U.S. tax resident.

Michael

Sorry, I corrected that in a later post.

Michael

You are married to a USC so you has the option of "Choosing Resident Alien Status" and declaring your foreign income on form 2555 and foreign tax credits on form 1116 and being treated as if you were a LPR for the full year including taking the standard deduction and tax credits like any USC. You must file a joint return with your USC wife when using that option.

Page 8 - Choosing Resident Alien Status

U.S. Tax Guide for Aliens

If HH itemized last year since he filed dual-status and was married last year to his USC wife, he should be able to also file an amended return and take advantage of that provision if it is beneficial tax wise. Make sure it is beneficial before you file.

You generally make this choice when you file your joint return. However, you also can make the choice by filing Form 1040X, Amended U.S. Individual Income Tax Return. Attach Form 1040, Form 1040A, or Form 1040EZ and
print “Amended” across the top of the corrected return. If you make the choice with an amended return, you and your spouse must also amend
any returns that you may have filed after the year for which you made the choice.

You generally must file the amended joint return within 3 years from the date you filed your original U.S. income tax return or 2 years from the date you paid your income tax for that year, whichever is later.

Steve_

Er... can't be bothered to read all the other replies, but you file a dual-status return. You can elect to be treated the same as anyone else but then yes, your income prior to moving to the US becomes taxable in the US.

Dual-status return is basically two tax returns, one for before you moved and one for after you moved. The break point is when you showed intent to become resident as explained in IRS publication 519, but basically - the date you took up residency.

So on the 1040NR you list what US-source income you had before moving (usually nothing, so basically you fill in your name and address and SSN, sign it, leave the rest blank and put "dual-status statement" across the top - note it's quicker to use 1040NR-EZ for this bit). Then you do your 1040 and put dual-status return across the top, there are certain things that cannot be claimed because you weren't in the US the whole year which are listed in publication 519.

And no there is no software that can do it and most accountants probably can't either.

If you're really, really stuck, there is an example provided in the 2011 edition of 519: http://www.irs.gov/pub/irs-prior/p519--2011.pdf page 35 onwards.

Steve_

Yeah but then you're taxed on your UK income. And you can't claim a foreign tax credit, because you were resident in the UK at that point so you're not eligible for it.

You have to file individually for dual-status.

Note also 2014 was the first year for the ACA and there's a 90-day grace period, so unless you got coverage within a few days of arriving, you're going to get stuffed on that point by claiming to be resident the whole year and end up with a tax penalty.

Michael

You'll notice that item 3 indicates "You are married to a U.S. Citizen or resident alien at the end of the year" which is one condition of "all of the following apply" in order to chose that option.

JAJ

It is not. It is a single return (1040 for inbound dual-status) with a supporting statement/schedule showing details for the time before becoming U.S. resident.

The "dual status statement" is a supporting schedule only and should not be signed. Instead, any relevant figures should be included on the 1040.
From the IRS website:
Taxation of Dual-Status Aliens

Quoted:

Statement

Any statement must have your name, address, and taxpayer identification number on it. You do not need to sign a separate statement or schedule accompanying your return, since your signature on the return also applies to the supporting statements and schedules.


Really? TaxACT say their software supports dual status.
Dual-Status Taxpayer | Help Topics | TaxACT


Really? Any serious tax practitioner (CPA etc.) should be perfectly capable of preparing a dual status return.

In any case, forum discussion makes dual status returns into something a lot more complicated than the reality in 95%+ of cases. Most people do not have any U.S. connected income during their time as a non-resident so that simplifies things greatly, to begin with.

Ash14297

Exactly what I was looking for, thank you! And extra thanks for providing a link to TaxAct. I was struggling to find a website that allows e-file for dual status! Depending on how I get on at my consultation with Deloitte, I might just do it myself online.

So how does State Tax Return work for Dual Status? I noticed tax act has a deluxe version which includes state.