Dual Status Filing

brians · Post by **brians** » Thu Apr 13, 2006 11:35 pm

It's coming close to the tax deadlines but hopefully someone can shed some light on dual status filing. I've read a lot about dual status filing but I still have some questions.

I'm a Canadian citizen that use to work for a US firm in WA state as resident alien. I moved back to Canada in (July) 2005 and was employed by a Canadian firm for the remainder of the year.

Based on IRS pub 519 I should file a "dual status return" - 1040 for Jan to June and 1040NR for July to Dec. My 1040 would include all income that I earned while employed in the US between Jan and Jun. What do I include on my 1040NR? I gather that I should only claim income from US sources so I should not include any of my Canadian earnings on the 1040NR. The IRS guides imply that I should "copy over" earnings and deductions from my completed 1040 to the 1040NR - am I reading this correctly? If so, what values am I "copying over"? The bottom line is, in the above scenario, what should I claim on my 1040NR when filing a dual status return?

I've also learned (thanks in large part to these forums) that I have another option of filing a 1040 for the entire year of 2005 and then claim a foreign tax credit for my Canadian earnings using form 2555. I haven't run through the numbers but what's the advantage of this scenario over the dual-status return?

Thanks from a very confused and procrastinating canuck...

nelsona · Post by **nelsona** » Fri Apr 14, 2006 12:17 am

Your best option is to file a full-year 1004 and to use 2555, but this is not a foreign tax credit, it is an exclusion of your Cdn wages. This is how the vast majority of US citizens living in Canada file (unless they have kids).

You have to wait until you have left an entire year to file this way (or at least 330 days outside US), so you need to file for an extension.

worryfreeinvestor · Post by **worryfreeinvestor** » Sat Apr 15, 2006 8:09 pm

Although one has a choice about whether to be dual status or full-time U.S. resident in the year of move, and the latter tends to be more favorable, I do not think it's a no-brainer.

The reason I will submit my tax return on April 17 and not over a week ago is that I see very little daylight between the two methods, for my own situation.

I moved to California on April 29. In April I sold a lot of Canadian securities and had a significant capital gain, upon which I recently paid tax to Canada on my "departure" tax return. I can get a foreign tax credit from the U.S. but NOT from California. So, I pay Canadian, BC, and California tax on that, without relief.

By my wife and I both filing singly, NR, we lose the benefits of the superior deductions that married filing jointly receive, but avoid paying California its windfall.

So, by not choosing the full-time resident method, we pay more US tax and less California tax.

Either way gives about the same result, net.

(Also, it is so much simpler to do the 1040NR and avoid that bloody 1116. What monster designed that?)

What do you think? Am I off-base or does the above make sense? Am I correct in understanding there is NO state foreign tax credit, certainly for California?

48 hours to go! Ooh-Ah!

nelsona · Post by **nelsona** » Sat Apr 15, 2006 11:32 pm

Cali is quite agressive in its tax policy, but I somehow doubt -- without looking -- that they do not tax before residents arrive and after residents leave.

worryfreeinvestor · Post by **worryfreeinvestor** » Sun Apr 16, 2006 2:48 pm

Exactly, and that's why (in my case) dual status 1040NR likely works better, because then I don't report that cap gain to California. If I choose married filing jointly and report for the whole year, I must, because the status you use for the state must be the same as that you use for the federal.

nelsona · Post by **nelsona** » Mon Apr 17, 2006 7:31 am

Why would you say that filing a 1040 or 1040NR would have a bearing on how you file in California?

You can file a 1040, and still file a part-year Cali return, just like the guy beside you who moved from Colorado.

He's married, he's filing joinr, but he sure as heck is not filing as a full-year Cali resident!

If your software is not able to handle it, file on paper.

nelsona · Post by **nelsona** » Mon Apr 17, 2006 7:45 am

...In fact, I would even venture to say that you are NOT required to file jointly in Cali even if you filed jointly on 1040.

There is nothing I have seen on ftb that would indicate this. That is why they have 540NR in the first place.

But I would say, that evben if your file 1040NR, if you made a cap gain after arriving in US or arriving in Cali, its taxable in US and Cali regardless of filing 1004,540, 1040NR or 540 NR.

Conversly, if you sold before moving to cali, its not taxable in cali: period.

cullen · Post by **cullen** » Mon Apr 17, 2006 9:00 am

You are nor necessarily taxable in CA on the income, but it is included as an adjustment to Federal amounts on the 540NR to determine the ratio for the deductions CA allows. In effect, they tax all income and then take a percentage of the tax and deductions

See the instruction for the 540NR
http://www.ftb.ca.gov/forms/05_forms/05_540nrcains.pdf
page 2, 2nd column.
They also do not recognize the foreign income exclusion or any income excluded by treaty in this calculation

brians · Post by **brians** » Mon Apr 17, 2006 4:59 pm

nelsona wrote:Your best option is to file a full-year 1004 and to use 2555, but this is not a foreign tax credit, it is an exclusion of your Cdn wages. This is how the vast majority of US citizens living in Canada file (unless they have kids).

You have to wait until you have left an entire year to file this way (or at least 330 days outside US), so you need to file for an extension.

Thanks nelsona. I filed for an extension and so now I can qualify for the 330 day "rule". Would it matter that the return is for the 2005 calendar year and that I wasn't outside of the US for 330 days for the 2005 calendar year? Using the extension to qualify for the 330 days seems like a loophole in the guidelines. Am I being overly paranoid or is this a valid interpretation of the guidelines?

nelsona · Post by **nelsona** » Mon Apr 17, 2006 6:12 pm

You are not usng the bone fide presence test, you are using the physical presence test, which does not require it to be a calendar year, thus the 330 out of 365 day requirement. its not a loophole. How many US citizens do you thing leave US for a foreign job on exactly January 1st?

having you wait to file is to make absolutely sure that you will be gone those 11 months.

you will still have to pro-rate your exemption such that it is spread over two tax years. Its just that you won't need to avail yourself of the second part, sicne you are not a US citizen.

brians · Post by **brians** » Tue Apr 18, 2006 9:33 am

Can you elaborate on the pro-rated exemption? I thought that since I'm filing a full-year 1040 along with the 2555 that I qualify for the full exemption.

Which two tax years would the exemption be pro-rated against?

Tax year 1: Jan05 - Dec05
Tax year 2: ???

nelsona · Post by **nelsona** » Tue Apr 18, 2006 9:45 am

If you left, say, April 30th, 2005, the most foreign earned income you can exclude on your 2005 return, thru 2555, is 8/12ths of $80,000.

Only if you were gone the entire calendar year can you claim the full $80,000.

Have you not read the instructions for 2555? It really quite clearly expalins the basis for the exclusion, the type of income that can be excluded, and the method for calculating the exclusion.

nelsona · Post by **nelsona** » Tue Apr 18, 2006 9:48 am

For 2006, if you maintain your Cdn tax residency throughout the year, you will be allowed to claim the full $80,000 (assuming you make that much).

You would only be required to file a 1040 in 2006 if you keep your GC (if you even have one). Otherwise you return to the way you filed in US before you went to work there, that is toi say, not at all.

brians · Post by **brians** » Tue Apr 18, 2006 11:46 am

Sorry, I only gleamed the instructions for form 2555 before posting my last reply. After putting in some rough numbers it makes sense how the pro-rating fits into the bigger picture.

With respect to form 1040, I gather that I should be adding my Canadian income to my wages and salary section. What docs should I include to support this? Is a copy of my T4 (which is roughly equivalent to a US W2) sufficient?

As I don't have a GC I was planning on filing a 1040NR for the 2006 tax year with more-or-less zeros filled in to indicate that I've ceased my US residency for tax purposes. Is this necessary or can I just not file and the IRS will implicitly know that I'm no longer a US resident?

nelsona · Post by **nelsona** » Tue Apr 18, 2006 12:52 pm

You do not attach any cdn forms to your 1040. Generally, IRS is only intersted in forms which indicate that US tax has been withheld, otherwise they want you to keep all documentation, even US-source forms. If they want more, they will ask.

I think is is a good practice to submit a 1040NR in the year following departure. Remember, Cdns don't have to file a 1040-C 'Sailing permit', which would be the best (though laborious) way to indcate departure from US. 1040NR the following year fits nicely.

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