The year an individual enters or departs the U.S., there are often several options for filing a U.S. tax return. Working with a cross-border tax specialist that knows the “ins and outs” of the options will help you maximize your tax benefits.
The three primary ways individuals file a U.S. tax return are as a:
- resident alien;
- non-resident alien; or
- dual-status alien (utilizing a dual-status tax return).
What is a U.S. Dual-Status Tax Return?
Under Canadian tax rules, individuals often file a part-year return the year they become a Canadian resident. However, U.S. tax rules differ. While a U.S. corporate taxpayer may file a part-year return, humans are generally not permitted to do this. What does this mean? Even when resident in the U.S. for only part of the tax year, individuals file a full-year tax return.
Because of this, the year an individual enters or leaves the U.S., they are usually both resident aliens and non-resident aliens on the same return. Hence the name – “dual-status.” It’s basically a return in which an individual is resident for a part of the year, and non-resident for the remainder.
Filing a U.S. Tax Return as a Resident Alien
Residents report worldwide income on the traditional Form 1040. Like U.S. citizens, they have access to many of the credits and deductions, with some exceptions.
Filing a U.S. Tax Return as a Non-Resident Alien
In contrast, U.S. non-resident aliens report only US-sourced income on a Form 1040-NR. On a 1040-NR, neither the “head of household” nor “married filing joint” statuses are available. Furthermore, under the Tax Cuts and Jobs Act (TCJA) of 2017, personal exemptions are suspended. While the standard deduction increased, it is not available to those who file a Form 1040-NR. On top of this, only limited deductions can be taken on a Form 1040-NR. So, with all these restrictions, a bigger financial impact may result for those filing a U.S. tax return as a non-resident.
Filing a U.S. Dual-Status Tax Return
Fortunately, there are several elections that may be made when filing a dual-status tax return.
Your status as an inbound or outbound alien depends on the way your residency changes during the tax year. Inbound aliens, are those moving into the U.S. Because their status at the end of the year is resident, the resident Form 1040 return is filed on top. Outbound aliens are just the opposite – individuals departing the U.S. with a non-resident status at the end of the tax year. They file a non-resident Form 1040-NR on top.
Residency Tests
To determine whether you are a resident alien, non-resident alien or both during the year, there are two tests to consider:
- The green card test – which is just that. if you hold a green card at any point during the tax year, you meet the test, unless it is abandoned, surrendered or administratively taken away. Keep in mind that allowing a green card to expire does not relieve you of the requirement to file a U.S. tax return.
- The substantial presence test – a math equation. This test is met if your days of presence in the U.S. are:
- At least 31 days in the current year; and
- 183 days in a three-year period computed as:
- current year days; plus
- 1/3rd of last year’s days; plus
- 1/6th of the days from two years ago.
It is important to note there are special rules regarding what constitutes a “day” in the U.S. For example, days in the U.S. for a Canadian that commutes to the U.S. daily for work, may be exempt from being counted as “days.” Be sure to include Form 8840, Closer Connection Exception Statement for Aliens if you file a return to override the substantial presence test.
Dual-Status Elections
Fortunately, there are several elections that can be made to improve your residency status for a better tax result.
The § 6013(g) election
This election is made by a U.S. citizen, or resident alien married to a non-resident alien. Consequently, after the election they are both resident aliens. This election can only be made once. It remains in effect until revoked with the IRS, for those who qualify and make it. The result? This election makes it possible to file under the “married filing joint” status, thereby accessing more deductions and credits.
The § 6013(h) election
This election is made by two married resident aliens, where one or both are dual-status residents. This election only applies to the year of the election and results in both spouses being taxed as full-year residents. Assuming both spouses continue to be U.S. residents going forward, they can usually file a joint return.
The § 7701(b)(4) election
This is a first-year election made by a full-year non-resident, that does not meet the substantial presence test. These are individuals who move to the U.S. after mid-year and do not hold a green card. So, they meet neither the green card test, nor the substantial presence test.
After making this election they become a dual-status resident – resident in U.S. from the time they move into the U.S. to the end of the year, but non-resident before that point.
The § 7701(b)(4) & § 6013(h) combination election
It is also possible to make what’s referred to as a combination election. A § 7701(b)(4) that takes you from being non-resident, to dual-status. Want to be taxed as a U.S. resident the whole year? Just add in the § 6013(h) election into the mix!
While you will be taxed on your worldwide income, you also get access to many of the U.S. tax benefits available to U.S. residents. This may make sense If you move into the U.S. from Canada. Canadian tax rates are generally higher, and you may be able to satisfy much of your tax obligations with foreign tax credits and the foreign earned income exclusion.
Got U.S. tax and Canadian tax compliance issues? Contact Cross-Border Financial Professional Corporation – When Perspectives Matter!
Karlene J. Mulraine, EA, CPA, CA, CPA (NH) is the President of Cross-Border Financial Professional Corporation. Follow us on Linkedin and Twitter, or hang out on Facebook.
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.