10 Tax Tips for Dual-Status Aliens

On January 1st, German citizen Hans Schlabaugh arrived in the United States for business meetings. He returned to Germany 10 days later. Then, on May 15th, Schlabaugh traveled to the U.S. again, this time on a visa to work for the American division of his employer for the remainder of the year.

For tax purposes, the Internal Revenue Service categorizes Schlabaugh as a U.S. nonresident alien until May 15th. From May 15th onwards, he is considered a U.S. resident alien. Will this impact the tax forms Schlabaugh files for that tax year?

In short, yes. He’ll need to file federal income taxes as a dual-status alien, which acknowledges him as both a U.S. resident alien and a U.S. nonresident alien in the same tax year. This typically occurs when a non-U.S. citizen enters or exits the U.S. during a tax year, provided certain residency criteria are met.

However, it’s essential to distinguish dual-status alien status from citizenship. It solely pertains to federal taxes, indicating that an individual must adhere to different tax regulations for different periods within the same year, depending on their status as a U.S. resident alien or nonresident alien.

Certain individuals, despite meeting the criteria for dual-status aliens, are exempt from this classification. This includes teachers, trainees, students, and individuals temporarily in the U.S., such as professional athletes or foreign government workers.

We’ve compiled 10 tips to help navigate the complexities of taxes for those who find themselves with dual-status classifications.

You may not be a U.S. resident, but your work demands that you reside in America for a significant period—perhaps several months. While this might seem like a straightforward situation for sorting out your income taxes, there’s an essential test that will eventually come into play.

Before you dust off your calculus primer or contemplate hiring a tutor, take comfort. This test doesn’t require any intensive studying. In fact, it might be one of the simplest tests you’ll ever encounter. It merely tracks the time you’ve spent in the United States.

To pass this test, known as the Resident Alien Test, you must have established a “substantial presence” in the U.S. This entails spending more than 31 days in the U.S. during the current tax year or more than 183 days over a three-year period, including the current tax year.

Furthermore, you’ll meet the criteria of the Resident Alien Test if you become a permanent resident of the U.S. without citizenship or are in the process of applying for citizenship. In such instances, the Resident Alien Test applies to individuals, such as those holding a green card, permitting lawful residence and work in the U.S. [source: Investopedia]. Discover how—and when—you’ll qualify as a nonresident alien next.

If you’re not a U.S. citizen but find yourself in the United States, the IRS may classify you as a nonresident alien. Unlike the Resident Alien test, which involves criteria such as possessing a green card and meeting specific residency thresholds, the Nonresident Alien Test doesn’t require these qualifications. In fact, it’s quite the opposite.

A nonresident alien status applies to individuals residing in the U.S. without a green card, colloquially known as an Alien Registration Card. This card signifies lawful permanent or conditional residency in the U.S., granting permission to work and travel between the U.S. and other countries [source: Bray]. If someone doesn’t qualify for a green card, they are deemed a nonresident alien.

Moreover, if a non-U.S. resident doesn’t meet the “substantial presence” requirement—meaning they haven’t spent 31 days in the U.S. during the current year or 183 days over a three-year period including the current year—they are also considered a nonresident alien [source: Investopedia].

When an individual is both a nonresident and resident alien within the same year, they must adhere to different tax regulations based on their alien status differences. It’s crucial to grasp the disparities between resident and nonresident alien taxes, which we’ll delve into further on the following page.

When a non-U.S. citizen is classified as a U.S. resident alien, they become subject to specific taxation on their income. Essentially, a resident alien is taxed on personal income in a manner akin to that of a U.S. citizen.

This implies that when filing federal income taxes, a resident alien must report all sources of income—be it interest, dividends, wages, or other compensation for services rendered. Additionally, income from rental properties, royalties, or any other income type must also be included in their tax filings. Furthermore, income earned globally should be accounted for when filing U.S. federal income taxes.

As resident aliens are taxed similarly to U.S. residents, they are subject to the same graduated tax rates established by the IRS. These tax rates, often referred to as tax brackets, range from 10 percent on taxable income of $9,075 or less to 39.6 percent on taxable income exceeding $406,750 [sources: Erb, IRS].

In most instances, nonresident aliens are obliged to file federal income taxes in the United States. Specifically, those nonresident aliens who earned income surpassing the personal exemptions permitted by the IRS, received funds from an estate or trust, or are responsible for the care of another nonresident alien, must withhold federal income tax and file federal income taxes by the end of the tax year.

However, there is a significant exception to this rule. Nonresident aliens are only required to declare sources of income originating within the United States.

To further complicate matters, there are exceptions to this exception. Certain investments, such as stocks, may still be subject to taxation. For instance, if you reside in Saudi Arabia and own a company operating in the U.S. as a nonresident alien, the income derived from the business could be subject to U.S. taxation. Dividends from such investments typically incur a 30 percent tax for nonresident aliens, unless they are capital gains resulting from the sale of a business or property, in which case they may be exempt up to a certain threshold—typically $250,000 [sources: IRS, Investopedia, Pomerlau].

During the period of the tax year when an individual is classified as a resident alien, they can typically avail themselves of the same tax credits accessible to U.S. citizens. This is because a resident alien adheres to the same tax rules and regulations as U.S. citizens.

Assuming eligibility requirements are met for each credit, a resident alien can usually claim credits such as the Child Tax Credit, Earned Income Credit, Adoption Credit, Child and Dependent Care Credit, and Credit for the Elderly and Disabled [source: IRS].

Additionally, unlike nonresident aliens, resident aliens can also claim foreign tax credits. These credits are designed to prevent double taxation by the U.S. and another country. Generally, if the tax rate in another country exceeds that of the U.S., no U.S. tax is levied on foreign income. Conversely, if the tax rate in another country is lower than in the United States, the U.S. tax is typically applied only to the disparity between the two rates. However, it’s important to note that this credit can only be utilized to offset U.S. taxes on income sourced from another country and cannot be used to reduce U.S. taxes on U.S. income [source: IRS].

It’s crucial to understand which tax deductions you can claim as either a resident alien or nonresident alien during the year in which you qualify as a dual-status alien. Your eligibility to claim these deductions hinges on your alien status.

For instance, if you are a nonresident alien, you generally cannot claim the standard deduction unless you are a student or business apprentice from India. However, you may be eligible to claim deductions for income related to your U.S. business activities and earnings, and itemize certain deductions such as charitable contributions, state income taxes, and some business expenses [source: IRS].

Nonresident aliens have a broader scope of deductions available to them, as they are entitled to the same tax deductions as U.S. citizens. For instance, nonresident aliens can claim deductions for certain medical expenses, real estate taxes, home mortgage interest, state income taxes, and other eligible expenses. Unlike resident aliens, nonresident aliens can also claim a standard tax deduction.

It’s important to note that when you have dual-status classification, you must navigate between the deductions applicable to income earned as both a resident alien and nonresident alien within the same tax year [source: IRS].

As a dual-status alien, understanding which exemptions you can claim and when is crucial. It all hinges on the periods during which you are considered a resident alien and a nonresident alien.

During the period when you’re classified as a resident alien, you’re eligible to claim the same exemptions as a U.S. citizen, including those for dependents.

However, the options are more limited during the time when you’re a nonresident alien. In this phase, you may only claim one personal exemption, provided you cannot be claimed as a dependent by anyone else. This rule applies even if you are married.

Certain exceptions exist, though. For instance, U.S. nationals or residents of Canada or Mexico may claim additional exemptions for spouses and dependents under specific circumstances. These circumstances may include scenarios where a spouse has no gross income and cannot be claimed as a dependent by another U.S. taxpayer, or when dependents meet standard dependent criteria [source: IRS].

For most individuals, filing a single federal tax return is standard practice. However, for dual-status taxpayers, the process is more complex.

A dual-status taxpayer must file two tax returns for the year—one for the period when they were a nonresident and another for when they were a resident alien. Adding to the complexity, it’s essential to know which forms to submit at the end of the tax year based on their status at that time.

For instance, if you conclude the tax year as a resident alien or a resident, you’ll need to submit Form 1040. On this form, you’ll designate it as a “Dual-Status Return” at the top, and attach a statement outlining your income for the nonresident period. This statement can be in the form of either Form 1040NR or Form 1040NR-EZ, provided you label it as a “Dual Status Statement.”

Conversely, a nonresident alien should file Form 1040NR or Form 1040NR-EZ. This applies to a dual-status taxpayer who neither resides in the U.S. on the tax year’s last day nor is a U.S. resident at the end of that same year. Similar to the resident alien filing, “Dual-Status Return” should be written atop the return, and an income statement attached [source: IRS].

If you’re not a U.S. citizen and reside and work in the country for only part of the year, you may have the option to file your federal income taxes as a full-year resident. Opting for this route, especially during a dual-status transition year, allows you to file just one tax return instead of two. Otherwise, you’d need to file tax returns in both the United States and your country of citizenship.

To qualify as a full-year resident for tax purposes, certain criteria must be met. For instance, this option is available exclusively to nonresident aliens married to either a U.S. citizen or a U.S. resident alien. Additionally, both spouses must consent for the nonresident alien to be treated as a full-year resident. To exercise this choice, both spouses must sign a statement and attach it to their tax return, and this status remains in effect until any changes in either spouse’s citizenship status or a requested revocation, separation, divorce, or death occurs [source: KPMG].

One of the primary advantages of being considered a full-year resident revolves around the ability to file a joint tax return, a topic we’ll delve into further in the following section.

For dual-status or nonresident aliens of the United States, opting to file as a full-year resident holds particular appeal due to the advantages it brings when filing a joint tax return. Choosing this designation effectively grants a dual-status or nonresident alien full taxpayer status in the eyes of the IRS, enabling them to file taxes as any other citizen would. Without being classified as a full-year resident, they are ineligible to file jointly.

While joint tax return filing is exclusive to married individuals, it offers numerous tax advantages, such as the opportunity to remain within a lower tax bracket or claim a higher standard deduction. Notably, dual-status aliens generally do not have access to standard deductions [sources: KPMG, IRS].

There are exceptions to the rule barring dual-status or nonresident aliens from filing jointly. If either is married to a resident alien or a U.S. citizen, they may file a joint tax return [source: IRS].