A dual status year describes the tax year when a foreign individual is a part-year U.S. resident taxpayer. This commonly occurs when a person comes to the United States and becomes a resident during the year or when someone leaves the United States and becomes a nonresident during the year. It can also happen when someone is in the United States as a nonresident because of a treaty exclusion (such as the teachers and scholars discussed in a previous post) and the exclusion period runs out during the year.
Individuals who find themselves in these situations will have two separate filing periods for the year. The return for their status at the end of the year will be the return filed with “Dual Status Return” written across the top. The forms are Form 1040 for the resident period that reports worldwide income for that period, and a Form 1040NR for the nonresident period that reports U.S. income only. The return for the status at the end of the year will have a statement or the other form attached to it. Any statements filed with a return must include the taxpayer’s name, address, and identifying number.
As an example, a person who becomes a U.S. resident during the year will file form 1040 reporting worldwide income for the resident period and attach a Form 1040NR to support any reportable income for the nonresident period.
Some restrictions apply to a dual status taxpayer. The standard deduction is not allowed. The Head of Household tax status and joint returns are not allowed. An exception to the joint return requirement is if the election to be taxed as a U.S. resident has been made, in which case there wouldn’t be the dual status year treatment—a Form 1040 would report worldwide income for the entire year. For a dual status year some exemption deductions are allowed, if allocated to the resident period. There are also some special rules for residents of Canada, Mexico, and South Korea.
U.S. tax will be calculated a little differently than normal for the dual status year. The worldwide income from the resident period is added to the U.S. effectively connected income, after allowable deductions, earned during the nonresident period, and the combined income is taxed at the same rates that apply to U.S. citizens and residents. Tax on any non-effectively connected U.S. sourced income earned during the nonresident period is calculated separately and combined with the tax as determined above.
If you or someone you know moves to or from the United States, contact us. We can help you navigate the tax filing process.