The Dual-Status Taxpayer Definition (Who is Subject to Tax)

A Dual-Status Alien Tax Overview 

The United States has one of the most complicated tax systems across the globe. That is because, unlike most countries that follow a Residence-Based Taxation (RBT) tax model, the United States utilizes a Citizenship-Based Taxation model. Making matters even more complex is the fact that while in the notes it only applies to citizens, in fact, CBT applies to US citizens, lawful permanent residents, and even foreign nationals who meet the Substantial Presence Test. This can be very confusing for non-US persons who become US residents –– and especially in their first year of residence in the United States. Let’s go through some of the basics of what happens when a non-resident alien becomes a dual-status alien for tax purposes in the first year of residency.

What is a Dual-Status Alien?

When a person is considered a dual-status alien for tax purposes, that means that they were both a non-resident and resident for US tax purposes — in the same tax year. The most common situation in which this is applicable is when a non-resident becomes a United States Resident for the first — and acquired resident status as either a Lawful Permanent Resident (LPR) or meets the Substantial Presence Test in that year. The tax implications can be relatively complex, so it is important to have a general understanding of the tax implications of being a dual-status alien.

First Year of Residency

As provided by the IRS:

• • • “If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date. “

What does this Mean?

This means that for example if you came to the United States on April 1 and then remain in the United States for the entire year as a resident, then your residency in the United States would be April 1 through the end of the year. Some distinction must be made between permanent residence and substantial presence:

Residency Starting Date Under Substantial Presence Test

As provided by the IRS:

• • • If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year.

    • However, you do not have to count up to 10 days of actual presence in the United States if on those days you establish that:

      • You had a closer connection to a foreign country than to the United States, and • Your tax home was in that foreign country.

    • In determining whether you can exclude up to 10 days, the following rules apply.

      • You can exclude days from more than one period of presence as long as the total days in all periods are not more than 10.

      • You cannot exclude any days in a period of consecutive days of presence if all the days in that period cannot be excluded.

      • Although you can exclude up to 10 days of presence in determining your residency starting date, you must include those days when determining whether you meet the substantial presence test.

        • Example. Ivan Ivanovich is a citizen of Russia. He came to the United States for the first time on January 6, 2021, to attend a business meeting and returned to Russia on January 10, 2021. His tax home remained in Russia. On March 1, 2021, he moved to the United States and resided here for the rest of the year.

        • Ivan is able to establish a closer connection to Russia for the period January 6–10, 2021. Thus, his residency starting date is March 1, 2021.

What does this Mean?

It means that in general, the substantial presence test means that a taxpayer will become subject to US tax as a US person from the first day they come to the United States in the first year they meet the Substantial Presence Test, although a certain number of days may be excluded at the taxpayer can meet certain requirements.

Residency Starting Date Under Green Card Test

As provided by the IRS:

• • • If you meet the green card test at any time during a calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day in the calendar year on which you are present in the United States as a lawful permanent resident.

    • If you meet both the substantial presence test and the green card test, your residency starting date is the earlier of the first day during the year you are present in the United States under the substantial presence test or as a lawful permanent resident.

What does this Mean?

Similar to the Substantial Presence Test, if a Taxpayer does not meet the Substantial Presence Test but does end up receiving a green card, then the green card residency will begin on the first day that a person is present in the United States as a Lawful Permanent Resident, noting that there are very specific tax rules involving permanent residency and what is considered in the United States.

Residency During The Preceding Year.

As provided by the IRS:

• • • If you were a U.S. resident during any part of the preceding calendar year and you are a U.S. resident for any part of the current year, you will be considered a U.S. resident at the beginning of the current year.

    • This applies whether you are a resident under the substantial presence test or green card test.

      • Example. Robert Bach is a citizen of Switzerland. He came to the United States as a U.S. resident for the first time on May 1, 2020, and remained until November 5, 2020, when he returned to Switzerland. Robert came back to the United States on March 5, 2021, as a lawful permanent resident and still resides here. In calendar year 2021, Robert’s U.S. residency is deemed to begin on January 1, 2021, because he qualified as a resident in calendar year 2020.

What does this Mean?

As provided by the IRS: The point the IRS is trying to illustrate is that if a person came to the United States in the prior year as a US resident and then obtained a green card and came back in the next year, then the subsequent year’s residency terms begin on the first date of that subsequent year.

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