How dual-status aliens can file US tax returns: a complete guide

Every US resident has to file an annual individual tax return. However, if you have been a US resident even for a part of a calendar year, you’ll still need to file a return. People who have been both residents and non-residents in the US during the same calendar year are called dual-status aliens. Dual-status aliens’ filing differs from those who live in the US as permanent residents or citizens.
Below we are going to explain which people fall under the category of dual-status aliens, how they should file their taxes, which mistakes they need to avoid, and what they need to keep in mind when filing.

What is a dual-status alien?

Simply put, it’s a person who has been both a resident and a non-resident of the US during the same calendar year. This has nothing to do with citizenship — only with your tax status as someone who’s lived in the US for a substantial part of the year.

By substantial we mean that certain criteria have to be met for a person to be considered a US resident for that fiscal year. Making a determination on that front is called a “Substantial presence test” — and it’s regulated by the IRS. The essence boils down to this: to be considered a US resident, one has to be:

• Present in the US for at least 31 days of the current calendar year
• Accrue 183 days of US presence over three years (the current and two preceding ones)

But there’s an interesting catch: not all days during these three years are the same. All days of the current year are counted as one each, for the previous year as only ⅓, and for the year before that as only ⅙. This means you can live in the US for 120 days each of the three years and still not make the substantial presence test (because 120 + 40 + 20 = 180).

The most common occurrence for an individual being both a resident and a non-resident of the US during the same year is when they either enter or leave the US. While leaving the US is more or less straightforward, entering the US is where things become trickier.

If you are an immigrant who has been granted permanent residency in the US, then you automatically become a resident for US tax purposes for that year. We are talking about Green Card holders here.

What are the differences between residents and non-residents, taxation-wise?

The main difference is that resident aliens are taxed on all their income, regardless of whether it came from US sources or worldwide sources — the same way US citizens are taxed. Meanwhile, non-resident aliens only have to pay taxes from US-sourced income for the part of the year they spend outside the US.
There are several other differences:

• Self-employed residents have to pay an additional self-employment tax — while non-residents do not.
• Residents can choose a more favorable filing status (e.g., as a head of household or jointly with their spouses) — nonresidents’ scope is limited here.
• Certain deductions (like the standard 1040 Tax Return deduction) and exemptions that are available for residents are off-limits for non-residents.
• Finally, non-residents have to file a 1040NR IRS Form in addition to the standard 1040 IRS Form.

How to file taxes as a dual-status alien

There is really only one important thing from the bureaucratic viewpoint to keep in mind when filing as a dual-status alien: which form is your primary one: the IRS Form 1040 or the 1040NR (non-resident) — and which comes as an additional attachment.

Making a determination here is simple: you only need to understand if you were a resident on the last day of the calendar year. If you were, then the usual 1040 is your primary statement, and the 1040NR is the attachment. If you weren’t, it’s the other way around: 1040NR is the main form, and 1040 is the addition.

Deadlines and extensions

You must file no later than April 15 of the following year regardless of whether you were a resident or a non-resident when the current calendar comes to a close. However, if you receive wages not subject to withholding as a non-resident, you can file until June 15.

Both residents and nonresidents can file for a six-month extension, which will take them to either October 15 or December 15 — depending on whether the original date was April 15 or June 15. For that, you need to file a 4868 Form. You can do so electronically or mail a paper form to the IRS, but you must remember to do so before the original filing date (April 15/June 15) arrives.

Common mistakes to avoid when filing

Filing a dual-status alien tax return is not straightforward. We went ahead and compiled a list of mistakes you need to avoid when filing.

Filing the wrong tax form

We mentioned this above: you need either a 1040 or a 1040NR as your primary form. It depends on whether you were a resident on the last day of the year. Remember you’ll need to file the other one as well — as an attachment.

Using the wrong marital status to file

Non-resident aliens can file jointly with their resident spouses — but they can’t file jointly if their spouses are non-residents too. Each spouse must file separately, their income will be taxed at the highest possible rate.

Failing to include all taxable income when filing

This is a common occurrence when aliens elect to file as residents — and do not include their worldwide income in their return. It happens for several reasons:

• The worldwide income is taxed in the country of its origin, so the person thinks it shouldn’t be taxed in the US.
• Capital transactions might not be taxed in the country of origin, so people think they aren’t taxable in the US either.
• People hire a tax preparer to file their taxes — and the preparer fails to mention that worldwide income needs to be included as well.

Incorrectly claiming a tax treaty benefit

The US has tax treaties in place with 69 countries — and these present dual-status aliens with the opportunity to claim exemptions from taxes. To claim these exemptions, aliens don’t even have to be citizens of a country which is part of such a treaty — they simply need to be residents.

Failing to file federal/state tax returns

Failing to file federal tax returns commonly occurs when:

• The income is exempt from taxes under a treaty and a person thinks they don’t need to file. However, they still need to claim an exemption by filing a respective claim.
• The income was paid abroad and a person is unaware it can still be viewed as US-source based income — and thus needs to be taxed.

Meanwhile, aliens can also miss filing state taxes, They do need to file those when:

• Aliens are considered state residents.
• Aliens’ income is taxable under state legislation rules.
• Aliens’ income meets or exceeds a certain threshold after which it becomes taxable.

All three requirements need to be met for someone to qualify as a taxpayer under state rules.

Specific cases and considerations for dual-status aliens

The picture wouldn’t be complete if we failed to mention several other important considerations when you file taxes as a dual-status alien.

One such thing is how different types of income are treated for resident and non-resident aliens. Resident aliens are subject to the same taxation rates as US citizens. Non-resident aliens are largely treated to the same taxation scale as well; however, certain types of income which aren't connected to the US are taxed at a flat 30% rate. Here are some of these:

• salaries and wages
• interests (except for OID — Original Issue Discount)
• dividends
• rents
• premiums
• annuities

If you are a non-resident alien but are married to a resident/US citizen, you may choose to file a joint return. In this case you’ll be treated as a resident for taxation purposes. However, you won’t need to contribute to Medicare or Social Security tax-wise. But you will also be unable to claim tax treaty benefits.

Finally, tax treaties themselves deserve a mention here. If you are a non-resident/dual-status alien from a country which has a tax treaty with the US, then you might claim exemption from paying US taxes on certain types of income. The two most popular ones are income earned from employment and rendering individual personal services.

To be exempt from income-related tax you need to:

• Be present in the US for 183 inside the current calendar year
• Receive income from a foreign employer
• Make sure the foreign employer doesn’t have a permanent base in the US

To be exempt from taxes for individual personal services, you need to:

• Be an independent contractor or a self-employed individual
• Be present in the US for a certain number of days (determined by the treaty)
• Not have a fixed base of operations regularly available in the US

Conclusion

Dual-status aliens are those who have been both residents and nonresidents of the US during the same calendar year. Residents pay taxes from all their income (both US-sourced and worldwide), while nonresidents only have to pay taxes from US-sourced revenue streams.

Dual-status aliens need to attach two forms when filing for taxes: the usual 1040 Individual Tax Return and the 1040NR (nonresident tax return). These generally have to be filed no later than April 15; however, you can file for a six-month extension.

Nonresident aliens can’t claim certain deductions, exemptions and benefits that resident aliens can; however nonresident aliens can sometimes rely on tax treaty benefits to make their life easier.
When filing as a dual status alien, pay attention to which forms you file, which martial status you use, which benefits are available to you under two-way tax treaties — and whether you need to file for state taxes as well as federal taxes.

If this all sounds a bit too much to wrap your head around, we’ve got your back: give us a call — or drop us an email — and we’ll be happy to assist with filing your tax return. Once you’ve created your account, we’ll be in touch about a free-of-charge tax consultation.