If an individual is a citizen or resident of the United States at the beginning of the year but a nonresident alien at the end of the year, or a nonresident alien at the beginning of the year but a citizen or resident alien at the end, he is taxed for that year as if his tax year consisted of two periods, one for the time he was a U.S. citizen or resident and the other for the time he was a nonresident alien.
Although the income tax liability for the period that the individual is a nonresident alien is determined under the rules relating to nonresident aliens, the taxable income for the year that is subject to the regular graduated tax is determined by combining all income for the period of U.S. citizenship or residency with any income for the nonresidency period that is effectively connected with the conduct of a U.S. trade or business.
A dual status individual is entitled to one personal exemption, on the presumption that if a person is a nonresident alien for any part of the year, he will only be allowed one personal exemption. If the person was a resident of Canada or Mexico for the nonresident period, however, he may claim exemptions for the nonresident period for his spouse and children. In addition he is entitled to other allowable exemptions, but only to the extent those additional exemptions don't exceed his taxable income (determined without regard for any deduction for personal exemptions) for the period he was a U.S. citizen or resident.
The taxable income for the year that is subject to the regular graduated tax is determined by combining all income for the period of U.S. residency with any income for the nonresidency period that is effectively connected with the conduct of a U.S. trade or business.
If an alien individual determines that he is a foreign resident for treaty purposes in a tax year in which he is a dual resident, and he claims a treaty benefit as a U.S. nonresident, which reduces his U.S. income tax liability on any income item covered by the treaty, he is treated as a U.S. nonresident alien for that part of the tax year he is considered to be a dual resident taxpayer when computing his U.S. income tax liability. For these purposes, a dual resident taxpayer is an individual who is considered a U.S. resident under the internal laws of the U.S. and also a resident of a treaty country under that country's internal laws.
Election to be Treated as a Resident
The above rules don't apply to: an alien who is a nonresident at year-end, is married to a U.S. citizen or resident at year-end, and both elect to have the nonresident treated as a resident for joint return purposes for the year, or an alien who is a nonresident at the beginning of the year but a resident at year-end, is married to a U.S. citizen or resident at year-end, and both elect to have the nonresident treated as a resident for joint return purposes for the year.
To qualify for the election, you, as a U.S. citizen or resident spouse need to be a U.S. citizen or resident only at the close of the tax year. This means that a married couple moving into the U.S. may make the election for the year of entry to the U.S.
As a result of the election:
- you and your nonresident alien spouse agree to be subject to tax on your worldwide income;
- you may claim a personal exemption for your spouse;
- you may claim deductions for items that were paid by your spouse which would not otherwise be deductible by you if you filed a separate income tax return;
- your income would be subject to tax at the rates for married taxpayers who file joint returns;
- any exempt income of your nonresident alien spouse from a public international organization remains tax exempt;
- your nonresident alien spouse may not, for U.S. income tax purposes, claim the benefits from any U.S. income tax treaty.
In effect, if the election is made, you may be subject to income tax at a lower tax rate than if no election was made and you filed a separate income tax return.
The election is made by attaching a statement to your joint income tax return for the first tax year for which the election will apply. The statement must contain a declaration that you are making the election and the names, addresses and taxpayer identifying numbers of both you and your spouse. In addition, both you and your spouse must sign the election statement.
The decision to make this election depends on your income, both U.S. and foreign, and normally requires that at least two alternative tax filing situations be prepared to determine whether the election should be made.