A dual status alien is a person who is both a nonresident alien and a resident alien for U.S. tax purposes during the same tax year, most often in the year they arrive in or depart from the United States, and that status requires special tax filing rules. Nonresident aliens and resident aliens are required to comply with a variety of U.S. tax return rules, and those rules can change based on when U.S. tax residency begins or ends. This applies to non-U.S. citizens, immigrants, and individuals coming to the U.S. on business, for education, for marriage, or for other personal reasons, including people in different visa statuses who need to understand their filing obligations.
In this article we discuss what is a nonresident alien and a resident alien for tax purposes, how to determine alien status, and the different types of U.S. tax return filings for resident aliens, nonresident aliens, and dual status aliens. We also review exceptions to resident alien rules, tax elections, tax treaties, and Taxpayer Identification Numbers (ITINs). Understanding these rules is important for complying with IRS requirements, reporting income correctly, and claiming available tax benefits when your status changes during the year.
Determining Alien Status
Determining alien status is crucial for tax purposes in the United States. The Internal Revenue Service (IRS) uses the substantial presence test to ascertain whether an individual qualifies as a resident or nonresident alien. To pass the substantial presence test, an individual must be physically present in the US for at least 31 days in the current year and a total of 183 days during the 3-year period that includes the current year and the two preceding years. The calculation for the 183 days includes all the days present in the current year, one-third of the days present in the previous year, and one-sixth of the days present in the year before that.
However, certain individuals are exempt from the 183-day requirement. These exemptions include foreign government-related individuals, teachers or trainees holding a J or Q visa, students with an F, J, M, or Q visa, and professional athletes competing in charitable sporting events. Understanding these exemptions is essential for accurately determining your tax residency status and ensuring compliance with IRS regulations.
Resident Alien Tax Return
You are considered to be a resident alien if you meet either the green card test or the “substantial presence test.”
Resident aliens report their income and file an income tax return with the IRS using IRS Form 1040. This form is due on or before April 15 of the following year. Six month extensions are available.
Resident aliens are taxed on their worldwide income, not just their income earned in the U.S. For dual-status years, Form 1040 reports worldwide income for the resident period, which is the same rule that applies to U.S. taxes for citizens.
Resident aliens are eligible for all tax deductions, tax credits special elections.
What is the Green Card Test?
You are considered to have met the green card test if at any time during the calendar year you have a green card and are therefore a lawful permanent resident of the U.S. for immigration purposes. Green card holders are resident aliens.
Green card holders are required to file Form 1040 with the IRS even if their green card has expired. Otherwise they may be subject to penalties and interest.
What is the Substantial Presence Test?
In addition to the green card test, you are a resident alien if you meet the “substantial presence test.” Under this test, a resident alien is determined as follows:
- You have been in the US for at least 31 days in the current year, AND
- You have been in the US for 183 days or more over the past three years. For purposes of this test, days are calculated as follows:
- Number of days in the US in the current year
- 1/3 of the days in the prior year
- 1/6 of the days in the second preceding year
However, certain visa holders’ days do not count toward the substantial presence test, and some individuals must satisfy certain tests before being considered residents for US tax purposes.
Exceptions to the Resident Alien Rule For Tax Purposes
Certain individuals are not considered to be a resident alien for tax purposes. Here is the list:
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Individuals who are unable to leave the US due to a medical condition that you developed while in the US
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Individuals with diplomatic status
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Individuals employed with international organizations. This includes employees of the United Nations, the World Health Organization or international non-governmental organizations (NGOs)
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Individuals employed by foreign governments
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Teachers or trainees with “J” or “Q” visas
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Students with “F,” “J,” “Q,” or “M” visas
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Professional athletes competing in charitable sport events
These individuals are required to file Form 1040-NR with the IRS, paying tax on their US source income only.
Nonresident Alien Tax Return
If you are not a U.S. citizen or resident alien, then you are a nonresident alien for tax purposes.
Unlike U.S. citizens and resident aliens, nonresident alien are taxed only on US source income, so their non resident taxes generally apply only to that U.S.-source income.
Nonresident aliens are eligible for only limited tax deductions and tax credits. They are not able to file as married filing jointly or head of household. Married filing separately is allowed. Nonresident aliens do not qualify for the standard deduction.
Nonresident aliens are required to report their US source income and file their taxes with the IRS on Form 1040-NR by April 15, or by June 15 if they do not receive wages subject to withholding.
CPA Note: Enhanced tax benefits may be available to the dependents of nonresident aliens from Canada, Mexico, Japan, Korea and for certain Indian students.
Dual Status Alien Tax Return
A dual status tax year occurs when someone is a resident for part of the year and a non resident alien for another part of the year. Dual status aliens must write ‘Dual-Status Return’ on their tax forms. This typically occurs in the year of arrival or departure to the US. Dual status taxpayers must attach a statement showing income for the nonresident period to their tax return, and additional statements may be needed to clarify income sources.
Dual status aliens are not able to file as married filing jointly or head of household. Married filing separately is allowed. They are allowed limited itemized deductions. The standard deduction is not allowed. Dual status tax requires a split-year approach to tax obligations, so different rules apply to each period as a resident and as a nonresident. Dual status tax filers must adhere to specific requirements, and restrictions apply, including the following restrictions on deductions, credits, and filing status.
To file a dual status return, a dual status taxpayer generally files Form 1040 for the resident period and Form 1040-NR for the nonresident period as part of a dual status tax return. The implications of being both a resident and non-resident within the same tax year include unique filing rules and the necessity to correctly allocate income, expenses, credits, and deductions.
Choosing Nonresident Alien Tax Status
A resident alien may choose to be treated as a nonresident aliens for tax purposes, if they pass the the “closer connection” test. This test requires the following:
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You were present in the US for less than 183 days during the current year
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Had a closer connection during the year to a foreign country
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Maintained a tax home in the foreign country during the year
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Have not taken steps toward becoming a lawful permanent resident, such as a green card holder.
The exception is claimed by filing a Closer Connection statement, Form 8840, with Form 1040-NR.
However, the IRS will not approve this exception if you filed any of the following immigration forms:
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Form I-508, Waiver of Rights
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Form I-130, Petition for an Alien Relative
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Form ETA-750, Application for Alien Employment
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Form I-485, Application for Legal Permanent Resident Status
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Form I-140, Immigrant Petition for an Alien
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Form OF-230, Application for Immigrant Visa
Choosing Resident Alien Tax Status
There are a number of situations when an individual has the option to choose resident alien tax status.
Spouse Living in a Foreign Country
If the spouse of a US citizen or resident alien taxpayer lives in a foreign country, then the taxpayer make make an election for the nonresident spouse to be taxed as a resident alien. This is called a Section 6013(g) election. They will both pay tax on their worldwide income in the U.S. This election applies indefinitely.
The advantage of making this election includes the ability to file a joint tax return, which allows for lower tax rates and larger tax deductions. Foreign tax credits may also be available.
However, this election may result in the U.S. taxation of the wages of the foreign working spouse. Careful tax planning is required to determine whether or not this election will be beneficial.
Spouse is Dual Status Resident Alien for Tax Purposes
If one spouse is a resident alien, and the other spouse is a foreign national immigrating to the U.S., the taxpayer may wish to make an election to treat that spouse as a full-year resident alien for tax purposes. Some foreign nationals become dual-status aliens in the year of immigration. This is called a Section 6013(h) election. This election only applies in the year of immigration.
The advantage of making this election includes the ability to file a joint tax return, which allows for lower tax rates and larger tax deductions. There are also fewer tax returns to prepare and file with the IRS. Foreign tax credits may also be available.
However, this election may result in the U.S. taxation of the wages of a foreign working spouse earned prior to the time of immigration. Careful tax planning is required to determine whether or not this election will be beneficial.
Taxpayer Fails Substantial Presence Test
A nonresident alien who fails the substantial presence test may still qualify under Section 7701(B)(4) to be treated as a dual-status resident alien for tax purposes. For example, an individual entering the U.S. on an h visa, or a Mexican citizen who arrives during the year, may be treated as nonresident for part of the year and resident for the rest. This is called a Section 7701(B)(4) election.
The benefit of making this election includes the ability to take advantage of increased tax deductions on a U.S. tax return.
However, here too, this election may result in the taxation of non-US income. Careful tax planning is required to determine whether or not this election will be beneficial to a nonresident alien. This tax classification does not change the individual’s immigration status.
Tax Implications for Resident Aliens
Resident aliens are taxed on their worldwide income, which means they must report income from all sources, both within and outside the United States. They are subject to the same U.S. taxes and tax law rules as U.S. citizens on worldwide income and are required to file a tax return using Form 1040 to report their income. This form must be submitted to the IRS by April 15 of the following year, with an option for a six-month extension if needed.
Resident aliens may also be eligible for certain tax benefits, such as allowable deductions, credits, and the personal exemption deduction. These benefits can help reduce the overall tax liability. However, resident aliens must adhere to specific requirements, such as filing a tax return even if they have no US-source income. This ensures that all worldwide income is reported and taxed appropriately, in line with US tax laws.
Tax Treaties
If a person is a resident alien in the U.S. and also a resident of a foreign country for which there is a tax treaty in place, then the treaty will determine which country’s rules will apply. This is called the “Treaty Tie-Breaker Position.”
This only works if the compensation paid to the taxpayer comes from a non-US employer. Furthermore, if the compensation is paid by a non-US employer but charged back to a US business, the tie-breaker position may not be utilized.
Tax treaty positions must be disclosed to the IRS on Form 8833.
Taxpayer Identification Numbers
A taxpayer, their spouse and dependents are required to have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) when filing a US tax return.
Non resident aliens and resident aliens without work authorization are not eligible to receive a Social Security Number. Therefore, they will need to apply for an ITIN.
Our firm provides ITIN acceptance agent services, which makes the ITIN application process significantly easier. Check out our article, Getting an ITIN the Easy Way: Certified Acceptance Agent, for more detail on how this works.
For additional information on this topic, check out our article on The Connection Between Immigration and Taxes.
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