Dual-status year: arriving or leaving mid-year, and what India does to the answer

A dual-status year is a year in which you are a non-resident for part of the year and a resident for the rest. It is the most common place where an otherwise straightforward NRI return goes wrong, because the return, the rules and the software all change at once.

The most common dual-status years are the year of arrival and the year of departure.

When you are dual-status, and when you are not

Being in the US for part of a year does not by itself make you dual-status.

• Arrival. You are a resident from the first day of presence if you meet the substantial presence test for that year, or from the first day you are in the US as a green card holder. Someone who arrives in August on an H-1B with no earlier days usually does not meet the test that year. They are a non-resident for the whole year, not dual-status, unless they make a first-year choice (below).
• Green card mid-year. If you enter the US as a permanent resident on 10 September, you are a resident from 10 September, and a non-resident from 1 January to 9 September. That is dual-status.
• Departure. If you leave for India on 15 March after several resident years, you may stop being a resident on 15 March, provided you have a closer connection to India for the rest of the year and are not a resident the following year. Otherwise residency runs to 31 December. A green card holder stays a resident until the status is formally ended.

What is taxed on each side of the line

That second row is why the date matters so much. Indian income earned before your residency starts, or after it ends, is not taxed by the US. A rupee of NRE interest earned in February is outside the US return for someone whose residency starts in September.

It also makes timing a planning point. A sale of Indian property or investments after residency has ended is a foreign-source transaction of a non-resident, but the same sale a few weeks earlier would be taxed in full. Decide the dates with evidence of your closer connection to India in hand, not on the day of sale. A long-term green card holder should also read the exit tax article.

How the return is prepared

The IRS says a dual-status return is filed on the form that matches your status on the last day of the year: Form 1040 if you are a resident then, Form 1040-NR if you are not. The other part of the year goes on a statement attached to it. Write "Dual-Status Return" across the top of the main return and "Dual-Status Statement" across the top of the statement. Most consumer tax software does not handle this, so these returns are usually prepared by hand and mailed.

The restrictions are the price of the split:

• No standard deduction. You can itemise certain deductions instead.
• No joint filing, except by an election to be treated as a resident with a spouse who is a US citizen or resident. See the spouse article.
• No head of household filing status.
• Several credits are limited unless the joint election is made.

If the last day of the year finds you a non-resident with wages subject to withholding, the due date is April 15. A non-resident without such wages files by June 15.

The first-year choice

A first-year choice can treat you as a resident from an earlier date in your arrival year, when you would otherwise have been a non-resident all year. It needs a qualifying run of consecutive days in the US, a high proportion of days after that point, and meeting the substantial presence test in the following year. The election is made by a statement attached to the return. It is sometimes helpful and often not. Model both versions of the year before you choose.

FBAR and Form 8938 in a split year

The reporting obligations for Indian accounts run from the day you become a resident. In a year of arrival, count from the residency start date. In a departure year, the accounts you held during the resident part are reportable, even if you closed them after leaving.

What to do

1. Write down your arrival, entry and exit dates from the I-94 history, with a calendar.
2. Fix the residency start or end date first, and the closer-connection evidence for an end date.
3. Separate income and Indian transactions by period, not by calendar year.
4. Decide on the first-year choice, or the spouse election, with both versions calculated.

These returns are prepared by hand and are checked by hand by the IRS. An error in the dates changes every number on the return.