Dual-Status Taxpayers Tax Return Filing (5 Key Facts)

Dual-Status Taxpayers Tax Return Filing (5 Key Facts)

Dual-Status Alien Taxpayer Tax Return Filing

When it comes to filing US tax returns for taxpayers who are considered Dual-Status Aliens, it can get unnecessarily complicated when it comes time to file. That is because, with a dual-status tax return, the Taxpayer is only considered a US person for a portion of the year. For the other portion of the year, the Taxpayer is considered a non-resident alien and not subject to US tax on their worldwide income for that other portion of the year. Depending on the different sources of a dual taxpayer’s income — and whether they have foreign tax credits available or not — may significantly impact the overall tax implication of filing a US tax return. Let’s take a look at five important facts for dual-status taxpayers.

First Year Tax Return Filing

One of the most common types of situations involving a dual-status taxpayer is in the first year of becoming a US person. Let’s take for example a foreign resident who relocates to the United States on an H-1B visa in April of that year – and then resides for the rest of the year in the United States. For the first portion of the year, the person would be considered a non-resident alien (NRA) and only subject to US tax on their US-sourced income. Conversely, for the second portion of the year, the dual-status filer would be considered a US person and become subject to US tax on their worldwide income. Noting, that there are certain filing requirements that the taxpayer must meet in order to file a dual-status tax return.

Final Year Tax Return Filing

Another very common tax situation that involves a dual-status taxpayer is the situation in which a person gives up their US person status. Let’s say a taxpayer relocates to the United States on an H-1B visa, becomes a Lawful Permanent Resident (LPR), and then gives up their status in March of the final year (after 3 years of being an LPR). For that final tax year, they would typically be considered a dual-status taxpayer as well. That is because the Taxpayer is only considered a US person for the first portion of the year (subject to SPT). For the remainder of the year — presuming they resided outside of the United States — they would be considered a non-resident alien, and only subject to US tax on their worldwide income (final year dual-status returns may have additional filing requirements as well).

International Reporting Forms

For dual-status taxpayers with foreign accounts, investments, and other assets — they are still required to file any international information reporting forms for the portion of the year that they are considered a US person. In other words,  just because a taxpayer is only a US person for a portion of the year does not mean they are exempt from reporting foreign assets.  One example is Form 8938 (FATCA).

As provided in the Form 8938 instructions:

      • “If you are a specified individual for less than the entire tax year, the reporting period is the part of the year that you are a specified individual.”

6013(g) Election and FBAR

When a person makes a 6013(g) election for tax filing purposes, they may have to file certain international reporting forms associated with the filing of a 1040 tax return. But, one important fact to keep in mind is that just making a 6013(g) election, does not necessarily mean the taxpayer will become subject to FBAR.

As provided by FinCEN and summarized in the IRM:

      • “FinCEN clarified in the preamble to the regulations that an election under IRC 6013(g), Election to Treat Nonresident Alien Individual as Resident of the United States, or IRC 6013(h), Joint Return, Etc., for Year in Which Nonresident Alien Becomes Resident of United States, is not considered when determining residency status for FBAR purposes.”

Living Overseas as an Expat

If a US person resides overseas as an expat for a portion of the year — but does not formally expatriate from the United States — they are still considered a US person for the entire year — subject to making a treaty election to be treated as a foreign person for tax purposes. But, even if the Taxpayer makes this type of treaty election, it does not exclude them from the requirement to file certain international information reporting forms, such as the FBAR.

As provided in IRS Publication 5569:

      • Example: Kyle is a permanent legal resident of the U.S. Kyle is a citizen of the United Kingdom. Under a tax treaty, Kyle is a tax resident of the United Kingdom and elects to be taxed as a resident of the United Kingdom. Kyle is a U.S. person for FBAR purposes. Tax treaties with the U.S. do not affect FBAR filing obligations.

Missed Prior Years Foreign Account Reporting Deadlines?

If a taxpayer has not properly reported their foreign accounts, assets, or investments in prior years, they may want to wait before filing these documents for the current year. That is because Taxpayers should try to avoid making a quiet disclosure (which may result in significant fines and penalties). To do that, Taxpayers should submit to one of the offshore disclosure programs. Taxpayers may also want to consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in international tax matters before submitting to the IRS, in order to get an understanding of the different requirements.

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