Summing It Up

A 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.

Avoid potential tax ramifications in both the U.S. and Canada.

The United States has some mechanical rules for determining if one will be considered a resident for tax purposes.

Two Ways You Could Be a U.S. Resident

First, if you receive a Green Card, you will be granted the privilege of residing permanently in the U.S. as an immigrant. This will continue until either you surrender your Green Card or immigration authorities revoke it. As long as you hold a Green Card, you are required to file U.S. resident tax returns.

The second qualifying condition is if you meet the Substantial Presence Test. This is basically a 183-day of presence in the U.S. test—however, it's cumulative. You are considered a resident if you are 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 during the first preceding year, plus 1/6 of the days present in the second preceding year exceeds 183 days. (There are certain situations that allow an exemption of days for students, those in transit, commuters, and days spent for medical purposes.)

You must file a Form 8840 or Form 8843 and either attach it to your 1040NR or you may file it alone. These forms will exempt a non-U.S. citizen who meets the substantial presence test from being treated as a resident. They cannot be used by a Green Card holder.

There are also Treaty Tie Breaking Rules. Under Article IV of the U.S./Canada Treaty, there are several steps that you can follow to establish that even though you are present in the U.S. for over the required number of days, you actually have a closer connection to Canada. You must file a Form 8833 and disclose your position.

Now What?

If it is determined that you are a resident of the U.S. for tax purposes, you will be taxed on Worldwide Income, regardless of where it is earned. You will also be required to file any of the Foreign Reporting Forms required of U.S. persons, such as FBARs, and Forms 8938, 5471, 8865, 8621, and 3520, to name a few.

If you are determined to be a non-resident, you are taxed on U.S. Source Income only. However, if you are taking a Treaty Position to be taxed as a non-resident, you are still required to file all of the reporting forms as named above.

Canada also has established consequences for being out of the country for too long. The Entry-Exit Initiative was due to be implemented June 30, 2014. This does not have a temporary stay at the moment. Under the Initiative, travelers will be required to swipe their passports upon entering and leaving each country. Canada and the US will share this information. Both countries remain dedicated to full implementation of the Initiative.

When fully implemented, this Initiative would allow both countries to be able to track, in real-time, the number of days actually spent in each country. All days are counted in this total, including days for work, vacation, and day trips for shopping or entertainment. 

Once a Canadian resident loses his resident status, he is deemed to have disposed of his assets, which may generate a large tax bill. They may also risk the loss of the entitlement to Provincial Health Care. The time period out of the country depends on your Province of Residency.

In addition to being deemed a U.S. Resident for Income Tax purposes, a person's estate could also become liable to U.S. Estate tax.

A Word to the Wise

Use extreme caution on counting the number of days of presence in the U.S. Generally, snowbirds should not extend their time past 120 days per year. Under the cumulative test, 120 days consistently will bring you to 180 days over a three year period. You do not want to risk consequences from either country by exceeding this number.

Contact Freed Maxick's International Corporate Tax Services professionals to discuss your specific situation and avoid unexpected tax liabilities, or call to speak with an individual directly at 716.847.2651.