US Dual Status Return

[khkyau]

Hi....

I am not sure if my interpretation of the US tax code is correct. So I think it may be a good idea to post here to ask for some valuable inputs.

For simplicity, lets suppose in 2011....
1) I am married
2) I work from Jan 1 to June 15 in a Canadian company. Work is done in Canada. No connection whatsoever to the US. Salary this period is 25K
3) From June 15 to Dec 31, I worked in USA under a work visa. Salary is 25K.
4) Wife also worked part year in Canada, but no US income.
5) none of us is US resident for 2010

I suppose we can elect to the IRS to be full year US resident and do a joint return. But, the IRS allows dual status return. My understanding is that I file:
1) 1040NR for the period Jan 1 to June 15. But my US sourced income that I have to report is zero. (the company is Canadian. Work done in Canada. No connection to USA).
2) For the 2nd half of the year, I'll file 1040, married filing separately. The income for this will be the 25K that I made from the USA company.

Isn't this more beneficial than doing full year resident and then claming foreign income exclusion or foreign tax credit for the Canadian income? For full year resident, the tax rate is still based on the full year income of 50K. You just take a "credit" for the canadian tax, but you end up being in the higher bracket.

Whereas, if my interpretation is correct, I only owe taxes to the USA on the 25K at a much lower rate if I do a dual status return. This is because on the 1040NR, the income is zero and the 1040 will only have income of 25K. I'll then end up in the lower bracket. This, of course, means I'll lose out on std deduction and claming my wife's exemption. However, the lower tax bracket may make up for the loss...

If my intrepetation is correct, then when I file my California retun, they also ask for the federal AGI. I'll also only have 25K AGI instead of 50K....

Correct? or too good to be true?

Thanks in advance.

[nelsona]

In the first year, you should try all three options (if you are allowed).

You will generally find that 1040 joint is best. The exclusion will take care of your Cdn income.

dual is MFS, as you say, but also no standard deduction.

California will allow you to report the AGI after exclusion, so this is not an issue.

[nelsona]

Even in the specific example you sate. Your taxes will be approx. half using MFS vs dual.