Illustration of Dual-Status Return

Sam R. Brown is single and a subject of the United Kingdom (U.K.). He temporarily entered the United States with an H-1 visa to develop a new product line for the Major Product Co. He arrived in the United States March 18, 2001, and left May 25, 2001, returning to his home in England.

The Major Product Co. later offered Sam a permanent job, and he returned to the United States with a permanent visa on September 10, 2001.

During Sam's temporary assignment in the United States, the Major Product Co. paid him $6,500. He accounted to his employer for his expenses for travel, meals, and lodging while on temporary assignment, and was reimbursed for his expenses. This amount was not included on his wage statement, Form W-2, given to him when he left the United States.

After Sam became permanently employed, his wages for the rest of the year were $21,800, including reimbursement of his moving expenses. He received a separate Form W-2 for this period. His other income received in 2001 was:

Interest income paid by the U.S. Bank (not effectively connected):

Dividend income paid by Major Product Co. (not effectively connected):

Interest income (in U.S. dollars) paid by the U.K. Bank:

Sam paid the following expenses while he was in the United States:

Before Sam left the United States in May, he filed Form 1040-C (see chapter 11). He owed no tax when he left the United States.

Form 1040NR

Sam completes Form 1040NR as follows.

Pages 1, 2, and 3. Sam prints his name, address, and social security number on page 1 of Form 1040NR. He prints "Dual-Status Statement" across the top of the form.

On line 8, Sam enters his salary while a nonresident. He enters the state income tax withheld from his salary on line 35 (carried from page 3, line 17, Schedule A) and the federal income tax withheld ($536) from his salary on line 55. He also carries these amounts to Form 1040 (discussed later).

Page 4. Sam also reports the not effectively connected U.S. income received while he was a nonresident alien. He reports the April and July dividends from the Major Product Co. in column (c) of line 70a, page 4. He figures the tax on his dividend income on lines 82 and 83 and carries it forward to page 2, line 49 on Form 1040NR. (The rate of tax on this income is limited to 15% by Article 10 of the U.S.-U.K. income tax treaty. Treaty rates vary from country to country, so be sure to check the provisions in the treaty you are claiming.)

Sam also reports $36, the amount of tax withheld at source by the Major Product Co. in column (a) of line 70a, Form 1040NR, and carries it forward to page 2, line 62a. Later he will report the amount on Form 1040.

Page 5. Sam is not required to report the interest credited to his account by the U.S. Bank during the period he was a nonresident alien. Interest on deposits with U.S. banks that is not effectively connected with a U.S. trade or business generally is treated as income from sources in the United States but is not taxable to a nonresident alien. He checks the "Yes" box on page 5, item L, of Form 1040NR, and explains why this income is not included on his return.

The interest income received from the U.K. Bank while Sam was a nonresident alien is foreign source income and not taxable on his U.S. return.

Sam completes all applicable items on page 5 of Form 1040NR. This provides the dates of arrival and departure, types of visas, and information concerning tax treaty benefits that he has claimed.

Form 1040

Sam completes Form 1040 as follows.

Page 1. Sam prints his name, social security number, and address on page 1 of Form 1040. He checks "Yes" for the Presidential Election Campaign Fund and "Single" under filing status. He also checks the exemption block for himself and prints "Dual-Status Return" across the top of the form.

Sam reports on line 7, Form 1040, all wages received during the period he was a resident of the United States ($21,800) and the wages received during the period he was a nonresident alien ($6,500) that was effectively connected with his U.S. trade or business. This income is taxed at the graduated rates.

Sam reports on Form 1040 the interest income credited to his account by the U.S. Bank and the U.K. Bank in September and December, while he was a U.S. resident. If any of the interest income received while he was a nonresident alien was effectively connected with his U.S. trade or business, he would also report these amounts on Form 1040. If he had paid foreign income tax on the interest income received from the U.K. Bank, he would claim a foreign tax credit.

The dividend income includes only the October dividend, which was received while Sam was a U.S. resident. The dividend income received during his period of nonresidence was not effectively connected with his U.S. trade or business and, therefore, not taxed at the graduated rates.

Sam completes Form 3903 (not illustrated) to figure his moving expense deduction and reports the total on line 26, Form 1040.

Schedule A (Form 1040). Sam cannot claim the standard deduction because he has a dual-status tax year. He reports his itemized deductions on Schedule A (Form 1040). The only itemized deduction he had while he was a nonresident alien was the state income tax withheld from his pay. For information purposes, he lists this amount on line 1, Schedule A, Form 1040NR, in addition to including it on Schedule A, Form 1040.

Sam totals his itemized deductions on line 28, Schedule A (Form 1040).

Page 2. Sam reports the amount from line 28 of Schedule A (Form 1040) on line 36, Form 1040.

Sam enters $2,900 for one personal exemption on line 38, Form 1040. He subtracts the amount on line 38 from the amount on line 37 to figure his taxable income, line 39.

Sam is now ready to figure the tax on his income taxed at the graduated rates. He uses the column in the Tax Table for single individuals. To this tax ($2,501), he must add the tax on the income not effectively connected ($36), the income taxed at the 30% or lower treaty rate. Since there is no line on Form 1040 for this computation, he reports the two amounts in the margin in the Tax and Credits area of Form 1040.

Sam figures his rate reduction credit using the worksheet in the Form 1040 instructions. He enters this credit on line 47.

Sam reports the total amount of tax withheld ($2,700) from his wages on line 59, Form 1040. He includes in this amount the tax withheld at source ($36 from line 62a, Form 1040NR) on dividends paid to him while he was a nonresident alien. He also writes a brief explanation.

Sam compares the total tax on line 58, Form 1040, to the total payments on line 66, to see if he has overpaid his tax or if he owes an additional amount. Since the amount of tax withheld and the amount of tax paid at source are more than his total tax, he has overpaid his tax. He subtracts the amount on line 58 from the amount on line 66 to figure his refund.

Sam checks to be sure that he has completed all parts of Form 1040 that apply to him. He also checks to see if he has completed the necessary parts of the Form 1040NR that he is attaching as a statement. He then signs and dates the return and enters his occupation.

Sam mails the return to the following address.
Internal Revenue Service Center
Philadelphia, PA 19255