First Year Choice vs. 1040 NR

By Alex Oware on 06/24/2015 10:00 PM

QUESTION: I came to the US from India 9/23/2014 with H1B Visa. I will be in US all of 2015 working. How do I make the first year choice and would I be considered as a dual status Alien?

ANSWER: You have the option of using the first year choice or filing form 1040NR for the year 2014.

First Year Choice

The first year choice only makes you a resident alien starting from the date you entered the US on H1B, so from 9/23/14. That would make you a dual status alien. You may indeed meet the substantial presence test for 2015, and if you do, you can make the first year election for 2014.

According to the IRS publication 519 - if you do not meet either the green card test or the substantial presence test, you can choose to be treated as a US resident for part of 2014. To make this choice, you must:

1.      Be present in the United States for at least 31 days in a row in 2014, and

2.      Be present in the United States for at least 75% of the number of days beginning with the first day of the 31-day period and ending with the last day of 2014.

So if you will make a first year choice - you will be considered US resident for 2014 starting Sep 2014 after you came to the US.

As stated earlier, the first year choice will make you a dual-status alien (resident since September, non-resident before September). To use First-Year Choice for 2014, you will need to wait until after you satisfy the Substantial Presence Test for 2015, which won't happen until the middle of the year, after the 2014 tax filing deadline. Therefore, you will need to file for an extension on your 2014 taxes, and pay an estimated tax at that time based on being nonresident alien. Restrictions for Filing Dual-Status Tax Returns

Unfortunately, filing as a dual-status alien subjects you to various restrictions:

  1. Standard Deduction – you can itemize deductions but you are not allowed to take the standard deduction.
  2. Head of Household – you cannot use the head of household filing status.
  3. Exemptions – for the part of the year you are a resident you can take exemptions for your spouse and dependents, but limited to your taxable income (figured without deducting personal exemptions). However, for the part of the year you are a nonresident, there are special rules if you are also a resident of Mexico, Canada, or South Korea. These special rules also apply if you are a student or business apprentice from India or a U.S. national.
  4. Joint Return – You cannot file a joint return if you are a nonresident unless you are married to a U.S. citizen or a resident alien and you choose to file jointly (MFJ). If you are married to a U.S. citizen or a resident alien and you do not choose to file jointly, you must file Married Filing Separately. You cannot take advantage of the lower tax rate for MFJ and Single taxpayers.

Please note that the Child and Dependent Care Credit as well as the Adoption Credit cannot be claimed by a married dual-status alien unless he chooses to file a joint return with his U.S. citizen or resident alien spouse. The same provision applies to the Education Credits, Credit for the Elderly or Disabled, and the Earned Income Credit.

An unmarried dual-status alien must use the tax rates for single taxpayers in computing his or her tax at graduated rates. He or she may not file as head of household.

A married dual-status alien must generally use the tax rates applicable to married taxpayers filing separately. However, he or she may use the joint rates if the individual and his or her spouse elect to be taxed as full-year residents as discussed above in bullet 4 under the restrictions.

 

Electing To Be Taxed as Full Year Resident

A nonresident alien who is married to an individual who is either a citizen or resident alien of the United States at year end may elect to be treated as a resident for the entire tax year. Both spouses must make the election, which applies to the year made and all subsequent years until terminated.

 The election, however, will not cause foreign citizens to be treated as U.S. residents for any tax year if neither spouse is a citizen or resident of the United States at any time during the taxable year.

The principal reason for making either of the full-year residency elections is to be eligible to file a joint U.S. tax return. A joint return cannot be filed if either the husband or the wife, at any time during the taxable year, is a nonresident alien. Making such an election removes the nonresident alien status for filing purposes.

If a full-year residency election is made, a joint return may be filed to use the lower joint tax rates, but the worldwide income of both spouses for the entire taxable year will be subject to U.S. tax. The foreign tax credit can offset the U.S. tax on foreign source income, subject to the foreign tax credit limitation rules. Additionally, the standard deduction is permitted.

***Disclaimer: I am a tax accountant and a CPA , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**