At AG Tax LLP, U.S. Canadian cross-border taxpayers frequently inquire about dual status tax filings.
The following is a brief overview on dual status tax filing for a Canadian citizen or resident moving or travelling to the U.S. prepared by AG Tax cross-border tax analysts. It is important and highly recommended to discuss all residency issues with a cross border specialist prior to moving to the U.S. or travelling within the U.S. for more than 183 days in a tax year.
What is Dual Status?
The term dual-status can often be confused with dual citizenship (citizens of two countries) or dual-resident. Dual status filings occur when an individual is a citizen/resident of the U.S. for a portion of the year (i.e. beginning or end of the year), and a non-resident alien for the other half. This results in two tax periods: one as a U.S. citizen/resident taxpayer, and the other as non-resident alien. One must determine income to be reported as a U.S. citizen/resident taxpayer and income to be reported as a non-resident alien.
Dual-status taxpayer vs Dual-resident/citizen
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. One must determine which country will consider them to be a resident under the treaty tie-breaker rules. It may be possible that the taxpayer may be considered a foreign resident due to tax treaty conditions, because he/she can claim treaty benefits as a U.S. non-resident resulting in a lower U.S. income tax liability.
When filing a Dual-status return, how is U.S. income taxed?
In determining the U.S. income tax liability for a dual-status tax year, different rules apply for the part of the year the taxpayer is a resident of the United States and the part of the year he/she is a non-resident. The most common dual-status tax years are the years of arrival and departure. For the period that the taxpayer is a non-resident, he/she is subject to taxes as a non-resident taxpayer in the U.S. i.e. only U.S. sourced income is taxable, while for the period the taxpayer is a resident/citizen, the person is taxed on worldwide income (both U.S. sourced and foreign-sourced income) earned during the residency period.
The income for the non-resident period is classified into two separate categories. Income that is subject to withholding and income connected with a U.S. trade or business that is subject to the graduated rates. All worldwide income for your period of residence and all income that is effectively connected with a trade or business in the United States for your period of non-residence, after allowable deductions, is combined and taxed at the graduated rates that apply to U.S. citizens and residents.
Personal exemptions as a Dual-status taxpayer
As a dual status taxpayer, one can claim all the same personal exemptions that are allowed to a U.S. Citizen, however, for the portion of the year he/she is considered a non-resident, only one personal exemption can be claimed. If the person was a resident of Canada or Mexico for the non-resident period, one may claim exemptions for his/her spouse and children. Note that some exceptions apply.
Filing jointly with your spouse
The above rules do not apply to a non-resident alien who is married to a U.S. citizen or resident either at the beginning or at the end of the tax year. Both must elect to have the non-resident spouse treated as a resident to be able to file a joint return. For this purpose, the U.S. citizen/resident spouse should be a resident/citizen at the end of the year. As a result, this election is only available in the year the taxpayer moves to the U.S. This election allows taxpayers to be subject to income tax at a lower tax rate than if no election was made and he/she filed a separate income tax return. It also allows itemized deductions of the non-resident spouse to be claimed on the joint return as well as the ability to claim certain credits not available to married filing separate taxpayers.
To decide whether the election is beneficial, the taxpayer would require two separate tax scenarios to be compared and analyzed. In general, the decision would be based on the taxpayer and spouses combined income and deductions.
AG Tax LLP Can Help
For further information on dual status tax filings, or any tax-related queries please contact us. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
