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Summing It Up

Keeping you ahead of the curve with timely news & updates.


Dual-Status Tax Returns: It is Possible to Have More Than One U.S. Income Tax Filing Status

dual status taxpayersA U.S. taxpayer can be both a nonresident alien and a resident alien during the same tax year. This usually happens when a person, who is not a U.S. citizen, first arrives in the U.S. or in the year that this person departs from the US.

A Dual-Status year requires filing U.S. Income Tax Returns, as both a Part-Year Resident and as a Part-Year Non-Resident.

How do you determine your filing status for your first year of Residency?

If you are a U.S. resident during a calendar year, but were not a U.S. resident at any time during the preceding calendar year, you are treated as a U.S. resident only for the part of the year that begins on your residency starting date.

You are a U.S. nonresident alien for the part of the year before that date.

How is your residency starting date determined?

This is not a simple determination.

If you meet the Substantial Presence Test, your residency starting date is generally the first day that you are actually present in the US.

The Substantial Presence Test is basically a 183 day of presence in the U.S. test. However, it is a cumulative test. If one is physically present in the U.S. for at least 31 days in the current year, and the sum of the days in the current year, plus 1/3 of the days physically present in the U.S. during the first preceding year, plus 1/6 of the days present in the second preceding year exceeds 183 days, then you are considered a resident.

If you meet the Green Card Test at any time during the calendar year,  but do not meet the Substantial Presence Test for that year, your residency starting date is the first day in that year on which you are present in the U.S. as a lawful permanent resident.

You meet the Green Card Test If you have been granted the privilege, according to immigration laws of residing permanently in the U.S. as an immigrant, you will be issued an alien registration card, also known as a Green Card.  As long as you hold a Green Card, you are required to file U.S. tax returns as a resident.

Choosing Resident Alien Status

When you are a dual-status alien, there are certain circumstances where you can choose to be treated as a U.S. resident for the entire year. You must meet all of the following:

  • Be a non-resident at the beginning of the year
  • Be a resident alien or citizen at the end of the year
  • Be married to a U.S. citizen or resident alien
  • Your spouse joins you in making the choice

You cannot make this choice if you are single.

You must attach a statement, signed by both spouses to your joint return for the year you are making this choice.

If you make this choice, both you and your spouse must file a joint return and are both taxed on worldwide income.

Last Year of Residency

If you were a U.S. resident in the current year of taxation, but are not a U.S. resident during any part of the current filing year, you cease to be a resident on your residency termination date.  

The termination date is December 31 of the year of taxation, unless you qualify for one of the exceptions for an earlier termination date.

The rules for determining filing status for your first year of residency and your last year of residency are quite complicated.  

Need assistance with a dual status tax return? At Freed Maxick, our tax services team can help you to assimilate these rules and determine what would be the best filing status for you, contact us here.

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The Tax Implications of DOMA

The Supreme Court’s decision on DOMA and Prop 8 is not only a civil rights win for same sex couples- it’s a financial win for many.

In an unprecedented event last week, the Supreme Court ruled that the 1996 Defense of Marriage Act (“DOMA”) singled out same-sex marriage and treated same-sex couples "as living in marriages less respected than others." This week’s ruling will now give same-sex couples many of the same benefits (and in some cases, drawbacks) as any other married couple in the eyes of the law. Married same-sex couples in a dozen states and the District of Columbia will now be eligible for more than “1,000 spousal benefits previously off limits under DOMA.” And the court's other decision on Wednesday, striking down California's Prop 8, paves the way for same-sex marriages to resume in that state.

Key Aspects of the DOMA Ruling Include:

  • Income tax: Same-sex couples will now be able to file their federal income taxes jointly. For many couples -- especially those where one person earns significantly more than the other -- merging incomes for tax purposes will result in big savings. In addition, many education benefits, such as the American Opportunity Tax Credit and Lifetime Learning Credit, are now available to the spouse in a same-sex marriage where one spouse pays for qualified expenses of the other. 

  • Health insurance: Some same-sex couples pay income tax on imputed income for the medical benefits one partner receives through the other's health insurance plan; this will now likely change. Meanwhile, many federal employees will likely be granted spousal benefits like partner health insurance.

  • Estate and Gift tax: Same-sex couples will also be exempt from gift tax when transferring assets to each other. Under DOMA, any gift between same-sex spouses of more than $14,000 (the 2013 annual gift tax exclusion) began utilizing the lifetime exclusion limit of $5.25 million-- after which tax was assessed on gifts exceeding the exclusion. Opposite-sex couples have never been subject to that tax.  Same-sex couples will also be eligible to “split” gifts to take advantage of a doubled annual gift tax exclusion ($14,000 above x 2 married individuals or $28,000 for 2013)  In addition, the unused lifetime exclusion of the decedent spouse is now portable and will allow the estate of the surviving spouse to utilize it. 

  • Social Security benefits: Same-sex couples will now be eligible for the same federal tax treatment and Social Security benefits as opposite-sex couples in the event that one spouse passes away. This means a surviving spouse will be eligible for Social Security survivor’s benefits and will be exempt from the federal estate tax on assets exceeding $5.25 million. Note: In states where same-sex marriage is banned, this issue still has to be sorted out as the Social Security Administration has based these benefits on the state of residence. 

While many will receive the benefits of this ruling; they will also receive its downside. For example, same-sex couples who divorce may be subject to the federal gift tax when dividing assets, or be partially responsible for the back taxes of the divorcing partner.  Also, same-sex married couples will now have to file as either married filing joint, surviving spouse or married filing separate.  Thus, the “marriage penalty” will impact some same-sex couples.  

What the decision doesn't do: While many specifics of the Supreme Court's ruling are still blurry, it appears that couples must be married at a state level for all of these federal benefits to apply -- meaning domestic partnerships and civil unions don't qualify. It's also unclear whether federal benefits will apply to same-sex couples who marry in a state where same-sex marriage is legal but move to a state where it's not recognized.

To learn more check out this special report detailing Post DOMA Tax Implications

We may be based in New York State, however Freed Maxick CPAs provides tax services to business all over the U.S., no matter your location: Alabama, AL; Alaska, AK; Arizona, AZ; Arkansas, AR; California, CA; Colorado, CO; Connecticut, CT; Delaware, DE; Florida, FL; Georgia, GA; Hawaii, HI; Idaho, ID; Illinois; IL; Indiana, IN; Iowa, IA; Kansas, KS; Kentucky, KY; Louisiana, LA; Maine, ME; Maryland, MD; Massachusetts, MA; Michigan, MI; Minnesota, MN; Mississippi, MS; Missouri, MO; Montana, MT; Nebraska, NE; Nevada, NV; New Hampshire, NH; New Jersey, NJ; New Mexico, NM; New York; NY, North Carolina, NC; North Dakota, ND; Ohio, OH; Oklahoma, OK; Oregon, OR; Pennsylvania, PA; Rhode Island, RI; South Carolina, SC; South Dakota, SD; Tennessee, TN; Texas, TX; Utah, UT; Vermont, VT; Virginia, VA; Washington, WA; West Virginia, WV; Wisconsin, WI; Wyoming, WY. We Serve all 50 States.

Contact us to learn more about our tax services

 

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"Snowbird" Tax Info: Canadians Filing U.S. Tax Residency

By: Howard Epstein, CPA

Are you a Canadian “snowbird” spending winters in the United States? You may not realize it, but you could be considered a U.S. tax resident. If this is the case, the basis on which tax residency is determined is through the IRS “Substantial Presence Test.”

For this purpose, you will be considered a U.S. tax resident if you meet the following requirements:

  • Physically present in the United States at least 31 days in the current year, and

  • 183 days during the 3 year period that includes the current year and the 2 years immediately before that.

If you fall into this category, don’t panic! There is potential relief available to Canadian citizens that are caught by this Substantial Presence Test:

  • You are present in the U.S. for fewer than 183 days in the current year.

  • You maintain a “tax home” in a foreign country during the year.

  • You have a “closer connection” to the foreign country where your “tax home” is than to the U.S.

Are there exceptions to the rule?

There are exceptions to the substantial presence test. The following are a few examples:

  • Days you are in the United States for less than 24 hours- when you are in transit between two places outside the United States.

  • Days you are in the United States as a crew member of a foreign vessel.

  • Days you can classify “exempt individual.”

The term “exempt individual” does not refer to someone exempt from U.S. taxes, but to anyone that claims exemption from counting days of presence in the United States. For example- a teacher or trainee temporarily in the United States under a “J” or “Q” visa, who substantially complies with the requirements of the visa. For a full list of exemptions and exceptions, please refer to the IRS substantial presence test.

What should you do next?

If you exclude days of presence in the United States because you fall under a special category, you must file Form 8840 (Closer Connection Statement) or Form 8843 (Statement of exempt individuals and individuals with a medical condition).

Freed Maxick International tax practice professionals can help you determine if you qualify as a U.S. tax resident, and assist you with Substantial Presence Test filings. We can navigate the IRS guidelines and minimize potential penalties. Contact us to connect with our experts. 

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