Most expats know the basics of U.S. tax filing and that there are two types of residents you can apply as: resident alien and nonresident alien. It seems simple as that, right? Unfortunately, it’s not all black and white as there’s a middle ground level called dual-status tax returns, and it catches a lot of people off guard every year.
The IRS states that “You are a dual-status individual when you have been both a U.S. resident and nonresident in the same tax year,” (IRS). Whether you’re moving in or out of the states, getting or giving up a green card, or in any other way on the fence, this status could apply to you. And unfortunately if you don’t handle it correctly, you could be paying more than you should at tax time.
What Is a Dual-Status Tax Return?
A dual-status tax return happens when you’re considered both a resident and nonresident for tax purposes within the same tax year. Simply put, that means you’re being taxed as a citizen part of the year (on worldwide income), and taxed as a foreigner the other half of the year (only on U.S.-sourced income).
You can see this happen in a plethora of scenarios:
- You moved to the U.S. mid-year to live or work
- You left the U.S. mid-year to move abroad permanently
- You received a green card partway through the year
- You gave up a green card partway before December 31st
For example, if you moved to the U.S. in July, you might be considered a nonresident alien from January-June, and a resident alien from July-December.
How the IRS Treats D.S. Taxpayers
To the contrary, the IRS doesn’t let you just pick one status to file with. Instead, you split the year into two parts:
- Resident portion: Where you report your worldwide income (U.S. and foreign)
- Nonresident portion: Where you report only U.S.-sourced income
When applying the split approach, keep in mind some complications that could arise:
- You can’t usually file jointly with a spouse (unless you have a special election)
- You can’t claim the standard deduction — only itemized deductions
- Certain credits and tax treaty benefits may be limited
On paper, this sounds pretty straightforward. In practice? It can be a long lasting headache.
How to File a D.S. Return?
If you’ve never filed a dual return before, it can be confusing to know where to start. Generally by the rule of thumb you’ll need to complete the following:
- Form 1040 – reporting the resident portion of your year
- Form 1040NR – reporting the nonresident portion
- A statement explaining your residency timeline, typically attached to the return
Before starting, it’s important to understand that you should follow IRS directions clearly. One of the biggest things the IRS specifically clarifies is that you need to write “Dual-Status Return” and “Dual-Status Statement” across each documents.
To add to any difficulties, these returns can’t be e-filed. You must file a paper return by mail, which unfortunately leads to longer processing times.
Can They Be Avoided?
Yes — however, it takes a lot of diligent planning. Before you make your moves, keep track of the dates and decisions that could impact your tax situation.
- Track your exact entry and exit dates. Even short trips can impact residency tests
- Consider elections carefully. For example, “Married Filing Jointly” option can sometimes reduce your overall tax burden.
- Review foreign tax credits. See how they’ll apply to your income during each portion of the year.
The Forgotten Return
A dual-status tax return is one of the IRS’s many forms that go unnoticed. Expats moving in or out of the U.S. don’t often realize they fall under this rule until it’s too late, and we’re here to help that from happening. Taxes are stressful enough as an expat, keep yourself informed on what possible returns you need to file once tax season comes around.
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