More Tax Tips for Dual-status Aliens
5: Take Advantage of Tax Deductions
It's important to know which tax deductions you can claim as either a resident alien or nonresident alien during the year you qualify as a dual-status alien. These tax deductions, and your ability to claim them, will depend on your status.
For example, if you are a nonresident alien, you will not be able to claim the standard deduction unless you are a student or business apprentice from India. However, generally, you can claim deductions on income that is related to your business activities and earnings in the U.S., and itemize certain deductions such as charitable contributions, state income taxes and some business expenses [source: IRS].
Nonresident aliens are given a wider berth when it comes to deductions because they are allowed the same tax deductions as U.S. citizens. For example, nonresident aliens can claim some medical expenses, real estate taxes, home mortgage interest, state income taxes and other deductions. Unlike resident aliens, nonresident aliens can claim a standard tax deduction.
Keep in mind that when you are considered dual-status, you will need to toggle between which deductions you are allowed on income earned either as a resident alien or nonresident alien during the same year [source: IRS].
4: Know Which Exemptions to Claim — and When
When you're a dual-status alien, you need to know which exemptions you can claim — and when. It will all depend on which portion of the year you are considered a resident alien and which portion of the year you are considered a nonresident alien.
When you're a resident alien, you're able to claim all the same exemptions as a U.S. citizen, such as dependents.
Things are a bit more limited when you're a nonresident alien, though. During the time of year when you are a nonresident alien, you may claim only one personal exemption (as long as you can't be claimed a dependent by anyone else). This one-exemption rule holds true even if you are married.
There are certain exceptions. For example, U.S. nationals or residents of Canada or Mexico may claim additional exemptions for spouse and dependents under certain circumstances, such as when a spouse has no gross income and cannot be claimed as a dependent of another U.S. taxpayer or when dependents qualify under normal dependent regulations [source: IRS].
3: File Two Tax Returns
For most people, filing a solitary federal tax return is the norm. For dual-status taxpayers, however, filing federal taxes is a bit more involved.
A dual-status taxpayer will need to file two tax returns for the year, one for the portion of the year when the person was a nonresident and another for when the person was a resident alien. As if this weren't complicated enough, you'll need to know which forms to file at the end of the tax year based on your status at the end of the tax year. For example, if you end the tax year as a resident alien or a resident, you will need to file Form 1040. At the top of Form 1040, you'll need to write "Dual-Status Return" and then attached a statement to the return that illustrates your income for the portion of the year when you were a nonresident. You may be able to use a Form 1040NR or Form 1040NR-EZ as the statement, as long as you write "Dual Status Statement" across the top.
A nonresident alien, on the other hand, will need to file Form 1040NR or Form 1040NR-EZ. This would be applicable to a dual-status taxpayer who does not reside in the U.S. on the last day of the tax year and who is not a U.S. resident at the end of that same year. When filing, "Dual-Status Return" will need to be written across the top of the return and an income statement will need to be attached [source: IRS].
2: Elect to Be Treated as Full-year Resident
If you are not a citizen of the United States, and even if you live and work in the U.S. for only part of the year, you may be able to file your federal income taxes as a full-year resident. This option may be especially attractive during a dual-status transition year because electing to be treated as a full-year resident in the U.S. allows the taxpayer to file only one tax return instead of two. Otherwise, the taxpayer would need to file a tax return in the United States and the country in which he or she is a citizen.
In order to be considered a full-year resident during a tax year, certain conditions must be met. For example, the option is open only to nonresident aliens who are married to a person who is either a citizen of the U.S. or a resident alien of the U.S. Plus, both spouses must agree for the nonresident alien to be treated as a full-year resident. To make this election, both spouses must sign a statement and attach it to their tax return, and the status will remain in force until either spouse's citizenship status changes — or a requested revocation, separation, divorce or death occurs [source: KPMG].
One of the chief benefits to being treated as a full-year resident centers around filing a joint tax return, which we explore in more detail in the next section.
1: File as a Full-year Resident
One of the main reasons a dual-status or a nonresident alien of the United States would want to file as a full-year resident is to gain the benefits of filing a joint tax return. Electing to file as a full-year resident makes a dual-status alien or a nonresident a fully-fledged citizen, at least in the eyes of the IRS when it comes to filing taxes. Without being designated as a full-year resident, a dual-status alien or a nonresident alien cannot file a joint return.
While the option of filing a joint tax return only applies to people who are married, it offers a number of tax benefits, including the ability to stay within a lower tax bracket or take a higher standard deduction. In fact, standard deductions aren't available to dual-status aliens as a general rule [sources: KPMG, IRS].
There are a few exceptions to the rule that a dual-status alien or nonresident alien can't file a joint tax return. If a dual-status alien or nonresident is married to a resident alien, then they can file a joint tax return. The same is true of a dual-status alien or nonresident alien who is married to a U.S. citizen [source: IRS].
Author's Note: 10 Tax Tips for Dual-status Aliens
It seems as if the many rules of federal tax are matched by nearly as many exceptions to the rules. Sometimes, there are even exceptions to exceptions. It's especially important to understand the complexities of federal tax code and, if you are a non-citizen of the United States, how a tax treaty with your country of origin may affect the taxes you file in the U.S.
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- IRS. "Taxation of Nonresident Aliens. Jan. 17, 2014. (Nov. 12, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens
- IRS. "Taxation of U.S. Resident Aliens." May 30, 2014. (Nov. 12, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Resident-Aliens
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