Dual-status alien
According to the Internal Revenue Service (IRS), a dual-status alien is a person that has been both a resident and nonresident alien of the United States in the same tax year. It has nothing to do with citizenship, and only applies to U.S. resident status for tax purposes. Dual-status tax rules are applied differently to resident and nonresident income. This type of situation could affect a Canadian that is required to file a U.S. tax return.
When someone is a resident alien of the U.S., you are taxed on income from all sources i.e. foreign and U.S. source income. If you receive the foreign source income while you are a resident alien, it will be taxable. This rule applies even if you earned the income while you were a non resident or you became a non resident after you received it and before the end of the year.
For non resident aliens, you are taxed only on U.S. source income. For non resident aliens, the type of income is broken into to two types:
- Income that is effectively connected (ECI) to a U.S. business or trade (i.e. wages or a rental property etc.). This ECI is taxed at the same rates that apply to U.S. citizens or U.S. residents filing tax returns.
- Income that is not effectively connected with a business or trade (i.e. passive income like dividends and interest from a U.S. source etc). Income from U.S. sources that is not ECI is taxed at a flat rate of 30% or a lower treaty rate.
Which tax return should be filed?
The income tax return that must be filed depends on the resident or nonresident alien status.
If on the last day of the tax year, a person is a U.S. resident then Form 1040 – U.S. Individual Income Tax return must be filed. “Dual-Status Return” must be written at the top. Attached to this return must be a statement showing income for the nonresident period (Form 1040NR – U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ – U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents). “Dual-Status Statement” must be marked at the top.
However, if the individual is a non resident of the United States on the last day of the tax year, Form 1040NR – U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ – U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents must be filed. “Dual-Status Return” must be written at the top. Attached to this return must be a statement showing income for the resident period (Form 1040 – U.S. Individual Income Tax Return). “Dual-Status Statement” must be marked at the top.
An illustration
Let’s illustrate these tax rules with a simple example. Take the case of John, a construction worker who is a dual-status alien. For the first six months of 2012, he was a U.S. resident alien and received $40,000 of income from his trade (U.S. source ECI), as well as another $10,000 of dividend income (NECI) from Canada.
The remaining six months of 2012, he is a non resident alien. During this time, he earns $5,000 of not effectively connected (NECI) dividend income from a U.S. dividend fund he purchased in the United States, and also earns another $15,000 of (NEC) dividend income from the U.K.
In John’s case, he will have to file a 1040NR because he is a non-resident alien at the end of the year. The $40,000 of effectively connected job related income, the $10,000 of NEC dividend income received from Canada that was received while a resident of the U.S., and $5,000 of U.S. source NEC dividend income from the U.S. dividend fund that was received while a non resident will be taxable. The $5,000 of dividend income from Canada will be taxed at 15% and not 30% because the Canada U.S. Treaty reduces the tax on the dividend income.
The $15,000 of NEC dividend income received from U.K. will not be taxable because it was foreign source income that was received while a non resident alien.
Filing deadlines
The following section regarding the deadlines to follow returns has been extracted directly from the IRS website.
“If you are a resident alien on the last day of your tax year and report your income on a calendar year basis, you must file no later than April 15 of the year following the close of your tax year. If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 4th month following the close of your tax year. In either case, file your return with the Internal Revenue Service indicated in the Form 1040 Instructions.
If you are a nonresident alien on the last day of your tax year and you report your income on a calendar year basis, you must file no later than April 15 of the year following the close of your tax year if you receive wages subject to withholding. If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 4th month following the close of your tax year. If you did not receive wages subject to withholding and you report your income on a calendar year basis, you must file no later than June 15 of the year following the close of your tax year. If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 6th month following the close of your tax year. In any case, file your return with the Internal Revenue Service indicated in the Form 1040NR Instructions.”
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