Your First U.S. Tax Year After Moving: Dual-Status Returns and the Elections That Change Them

The year a person moves to the United States is often the most complex tax year they will have. Income earned before the move may be outside U.S. tax, while income after the move is taxed worldwide. Deciding which rules apply, and whether an election produces a better outcome, is best done before the return is prepared — and ideally before the move itself.

When residency starts

Under the green card test, residency generally begins on the first day the individual is present in the United States as a lawful permanent resident. Under the substantial presence test, residency generally begins on the first day of physical presence during the year in which the test is met, although up to 10 days of presence can be disregarded if the individual had a closer connection to a foreign country during that time. An individual who meets both tests starts residency on the earlier date.

What a dual-status year means

For the part of the year before residency starts, the individual is a nonresident alien, taxed only on U.S.-source income and effectively connected income. For the part after, the individual is a resident, taxed on worldwide income. The return consists of a Form 1040 with a statement or Form 1040-NR for the nonresident portion, or the reverse, depending on the individual's status at year end.

Restrictions on dual-status returns

• No standard deduction; deductions must be itemized
• Married individuals cannot file jointly unless an election to be treated as residents is made
• Head of household status is not available
• Certain credits are limited or unavailable

The first-year choice

An individual who does not meet the substantial presence test in the year of arrival but meets it in the following year may, under certain conditions, elect to be treated as a resident for part of the arrival year. The individual must be present for at least 31 consecutive days in the arrival year and for at least 75 percent of the days from the start of that period to year end. Because the election is made on the return for the arrival year, it often requires filing an extension until the substantial presence test is met in the following year.

Electing full-year residence as a married couple

Under section 6013(g) and (h), a married couple in which one spouse is a U.S. citizen or resident at year end can elect to treat a nonresident spouse — or both spouses in a dual-status year — as U.S. residents for the entire year. The couple can then file a joint return with the standard deduction and joint rate brackets. The cost is that both spouses are taxed on worldwide income for the full year, including income earned abroad before the move.

Which approach is better?

A couple arriving mid-year with little foreign income before the move often benefits from electing full-year residence and filing jointly. A couple with a large foreign bonus, business sale or investment gain before arrival may pay less as dual-status taxpayers, keeping that income outside the U.S. tax base. Foreign tax credits and the foreign earned income exclusion can mitigate the cost of an election, but they do not always eliminate it.

Reporting that begins with residency

• FBAR for any year in which the individual is a U.S. person and foreign account balances exceed $10,000 in aggregate
• Form 8938 for specified foreign financial assets above the applicable threshold
• Form 5471 for interests in foreign corporations meeting the filing criteria
• Form 3520 for gifts or inheritances from foreign persons above the threshold
• Form 8621 for foreign mutual funds and other passive foreign investment companies

Planning before arrival

Timing income, recognizing gains and restructuring foreign holdings before residency begins can permanently keep amounts outside U.S. tax. Once residency starts, those options narrow. People planning a move — especially business owners and those with foreign investment portfolios — benefit most from reviewing the first year before they arrive.

Sources and official references

• IRS — Dual-status aliens
• IRS — Publication 519, U.S. Tax Guide for Aliens
• IRS — Substantial presence test
• IRS — Nonresident spouse