Tax Tip Tuesday: Moving to or from the US: Do you need to file a Dual-Status Tax

When you move to or depart from the United States, your tax residency status does not necessarily align with the calendar year. When an individual’s tax residency status changes mid-year—either upon arrival and becoming a tax resident, or upon departure and becoming a nonresident—they become classified as a dual-status individual. This unique position under the Internal Revenue Service (IRS) rules requires special filing steps and adherence to specific taxation and deduction rules that differ from those for full-year residents or nonresidents.

Dual-Status taxpayers are typically both US residents or nonresidents

What is a Dual-Status Taxpayer?

A dual-status taxpayer is an individual who is classified as both a U.S. resident and a nonresident for tax purposes in the same tax year. This status is determined by tax residency (e.g., meeting the Substantial Presence Test or holding a Green Card for only part of the year), not citizenship. The most common situations that create dual status are the years of arrival in the U.S. or permanent departure from the U.S..

How is Income Taxed During a Dual-Status Year?

In a dual-status tax year, your income is taxed based on your status during the period it was earned. The year is effectively split into two periods:

• Resident Period: For the portion of the year you qualify as a U.S. resident, you are taxed on your worldwide income (income from all sources).

  
  

• Nonresident Period: For the portion of the year you qualify as a nonresident, you are only taxed on your U.S.-sourced income.

All worldwide income from the resident period and all effectively connected income from the nonresident period are combined and taxed at the rates that apply to U.S. citizens and residents.

What Forms are Required for a Dual-Status Return?

The primary return you file depends on your tax status on December 31st of that tax year.

• Resident at Year-End: If you are a U.S. resident on the last day of the tax year, you must file Form 1040, U.S. Individual Income Tax Return. You must write "Dual-Status Return" across the top of the form. You are required to attach a statement—which can be Form 1040-NR, U.S. Nonresident Alien Income Tax Return—to show the income earned during your nonresident period. This statement should be marked "Dual-Status Statement" and should not be signed.

  
  

• Nonresident at Year-End: If you are a nonresident on the last day of the tax year, you must file Form 1040-NR (also marked "Dual-Status Return") and attach a statement (Form 1040) showing your resident period income.

It is important to note that a dual-status return cannot be filed electronically; it must be completed, printed, and submitted by paper mail to the IRS. Furthermore, a significant restriction for dual-status taxpayers is that you cannot use the standard deduction and must instead itemize any allowable deductions.

This article is only a summary of the complexities of analyzing your U.S. tax residency status. If you are an individual with a dual-status tax year and need assistance in preparing your US tax return and analyzing your potential tax situation, please contact May Sung at info@mkhstaxgroup.com.