Dual-Status: Expatriation Year Tax Returns when US Income is Zero

This week we are talking about dual-status returns. An email reader sent us this question, asking what his expatriation year tax returns should look like.

I file 1040 covering income up to the date of renunciation. Do I have to file 1040NR from the date of renunciation to the end of the year if I don’t have any US source income at all for either before or after renouncing?

The expatriation year income tax return is a little more complicated than that. It is slightly difficult to figure out whether you need to file Form 1040NR or Form 1040 as your tax return. Once you have figured that out, then you figure out what income to report on the return, and what income you do not have to report.

In the year of expatriation, you must file a tax return with the IRS. There are three possibilities for what you are filing:

• Form 1040 treating yourself as a resident for the full year;
• Form 1040NR treating yourself as a nonresident for the full year; or
• Form 1040NR treating yourself as a part-year resident and a part-year nonresident (this one is the “dual-status return”).

If you are filing Form 1040NR as a nonresident for the full year, you only report income from US sources. Income from foreign sources is generally not taxed by the US.

If you are filing Form 1040NR as a part-year resident and a part-year nonresident, it is a little more complicated – for part of the year you will report income from all sources worldwide, and for part of the year you will report income from US sources only.

Let’s look at the details.

Your tax year

Human individuals file tax returns using a calendar year, or January 1 through December 31. There are a few rare exceptions to this rule, but we will ignore those.

When the IRS looks at your tax return for the year you renounce your US citizenship (or give up your green card) they will be expecting to see a return that covers the entire calendar year.

It might seem counterintuitive: Your filing requirements should end on the date that you renounce. But that is incorrect. All humans must use a full 12-month tax year, which almost always must be a calendar year (January 1 through December 31). The only humans who can use a short year (January 1 through a date earlier than December 31) are dead people; their tax years end on the date of death.

Your tax return

To figure out what tax return you must file, look at yourself on December 31 – the last day of the tax year. What are you on that date? Because you are no longer a citizen or green card holder, you are an “alien” for income tax purposes.

Resident aliens, if they have a tax return filing requirement, must file Form 1040 and pay tax on their worldwide income.

Nonresident aliens, if they have a tax return filing requirement, must file Form 1040NR.

The general rules

You will need to figure out if you are a “resident alien” or a “nonresident alien” of the US for income tax purposes on December 31 of the year you expatriate.

You are a resident alien (and file Form 1040) if you spent too many days in the US in the three-year period ending with the year of renunciation. This is known as the substantial presence test.

It might be possible for you to be a resident alien and make a treaty election to be taxed as a nonresident of the US. This is a complicated subject that I will not be discussing here, but you should be aware it is possible.

You are a nonresident alien (and file Form 1040NR) if you did not spend enough days in the US to satisfy the substantial presence test.

Special rules for expatriation year tax returns

Even if you meet the substantial presence test in the year of expatriation, you might still be a nonresident on December 31 of that year.

For citizens who renounce, you get to use your date of renunciation as your first day of nonresident alien status.

For green card holders who terminate their green cards, you can use what is known as an “earlier termination date” if you meet the criteria given in IRS Publication 519.

Not splitting the tax year

If you file Form 1040NR because you make a treaty election to be taxed as a resident of another country, you will be taxed as a nonresident for the entire year, and you will report your income from US sources only.

You will still be required to file all the information returns you would normally need to file – FBAR, Form 8938, Form 5471, etc.

Splitting the tax year

If you file Form 1040NR and you either do not meet the substantial presence test or you qualify for an “earlier termination date”, then you are what the IRS calls a dual-status taxpayer.w

You will file a dual-status return.

For the part of the year that you are a citizen or green card holder, you report your income from all sources worldwide on your US tax return. This is from January 1 through the day before your renunciation date.

For the part of the year that you are considered a nonresident, you report your income from US sources only on your US tax return. This is from your renunciation date through December 31.

You will still be required to file all the information returns you would normally need to file – FBAR, Form 8938, Form 5471, etc.

IRS Publication 519 has some further guidance on how the dual-status return works.

Answering the question

Now we can answer the reader’s question.

He had no income from US sources. All of his income was from sources outside the US. Here is what he needs to report:

From January 1 through the day before renunciation, all income received by the taxpayer is taxable by the US. It is irrelevant whether it is foreign or US source – the IRS has this power based on the fact that the taxpayer is either a US citizen or green card holder.

From the date of renunciation through the end of the year, only US source income received by the taxpayer is taxable by the US. Since our reader had no US source income at all, he will be showing $0 of US source income for this time period on his tax return.

Usual disclaimer

Do not rely on this communication as advice to you, because it is not advice to you. You should get help from a professional if you need to make decisions.