Should I make the first year choice? benefits vs drawbacks? Are dual status aliens eligible for the economic impact stimulus?

[steevbe]

I arrived to the US last fall, 10/10/2019 and started working on 11/01/2019 with an H1B visa. For 2019 im considered a non-resident alien. However, given that I will satisfy the Substantial presence test (SPT) in 2020 I could make the first year choice to be considered a resident alien for 2019.https://www.irs.gov/individuals/international-taxpayers/residency-starting-and-ending-dates

my questions are the following:1/ Is it better to file as non- resident or to opt for the 1st year choice? what are the benefits vs. drawbacks associated with this?
2/ If I make the first year choice (dual status alien), will I be eligible for the economic impact stimulus (salary is below 70K), and for the months I worked in 2019 I earned less than 12K.
3/ If I make the 1st year  choice, am I considered a dual satuts alien? do I have to file part of the year (jan-october) as non-resident although I was not in the US
Thank you!

[pk]

@steevbe 

1. On Economic Impact Payment -- here is what IRS says :

  "   A2. Although some filers, such as high-income filers, will not qualify for an Economic Impact Payment, most will.

Taxpayers likely won't qualify for an Economic Impact Payment if any of the following apply:

• Your adjusted gross income is greater than
  • $99,000 if your filing status was single or married filing separately
  • $136,500 for head of household
  • $198,000 if your filing status was married filing jointly
• You can be claimed as a dependent on someone else’s return. For example, this would include a child, student or older dependent who can be claimed on a parent’s return.
• You do not have a valid Social Security number.
• You are a nonresident alien.
• You filed Form 1040-NR or Form 1040NR-EZ, Form 1040-PR or Form 1040-SS for 2019. "

2.    To make the first year choice  you have meet the following for the test period  ( starting from the date of admission )--> you must be here for at least 31 days and  75% of the days in the test period and you will pass the  substantial presence test during the  following year.

Please page 7 & 8 of IRS pub 519  ---- here is a quote: of the  section:---->

First-Year Choice
If you do not meet either the green card test or the substantial presence test for 2018 or 2019 and you did not choose to be treated as a resi-dent for part of 2018, but you meet the substan-tial presence test for 2020, you can choose to be treated as a U.S. resident for part of 2019. To make this choice, you must:
1.
Be present in the United States for at least 31 days in a row in 2019, and
2.
Be present in the United States for at least 75% of the number of days beginning with the first day of the 31-day period and end-ing with the last day of 2019. For purposes of this 75% requirement, you can treat up to 5 days of absence from the United States as days of presence in the United States.
When counting the days of presence in (1) and (2) above, do not count the days you were in the United States under any of the exceptions discussed earlier under Days of Presence in the United States.
If you make the first-year choice, your resi-dency starting date for 2019 is the first day of

the earliest 31-day period (described in (1) above) that you use to qualify for the choice. You are treated as a U.S. resident for the rest of the year. If you are present for more than one 31-day period and you satisfy condition (2) above for each of those periods, your residency starting date is the first day of the first 31-day period. If you are present for more than one 31-day period but you satisfy condition (2) above only for a later 31-day period, your resi-dency starting date is the first day of the later 31-day period.
Note. You do not have to be married to make this choice.
Example 1. Juan DaSilva is a citizen of the Philippines. He came to the United States for the first time on November 1, 2019, and was here on 31 consecutive days (from November 1 through December 1, 2019). Juan returned to the Philippines on December 1 and came back to the United States on December 17, 2019. He stayed in the United States for the rest of the year. During 2020, Juan was a resident of the United States under the substantial presence test. Juan can make the first-year choice for 2019 because he was in the United States in 2019 for a period of 31 days in a row (Novem-ber 1 through December 1) and for at least 75% (0.75) of the days following (and including) the first day of his 31-day period (46 total days of presence in the United States divided by 61 days in the period from November 1 through December 31 equals 75.4% (0.754)). If Juan makes the first-year choice, his residency start-ing date will be November 1, 2019

Suggest you read those pages  before deciding.

As a resident you file form 1040 ( supported by TurboTax ) whereas Non-Resident Aliens file form 1040-NR or 1040-NR/EZ -- note supported by TurboTax, you have to use a tax professional or SprinTax or similar.

As a resident you are taxed on world income whereas  Non_Residents  are taxed  ONLY on US sourced income.

As a Resident  you can use Married Filing Joint ( if you are married )  while Non-Resident's are treated as Single

Many of the credits & deductions are limited to Residents ONLY

 Hope this helps

[steevbe]

Thank you PK, but I'am aware of the information you copied form the IRS website. Im afraid that doesn't answer my questions. Does anyone else have any further insights?

[pk]

@steevbe  you are welcome .   Great that you had done your research.  Clearly you are looking for a different answer -- however I would like to point  out that  based on your  questions 

1. should you make the first year choice -- ONLY you can answer that -- the differences are substantial as pointed out above , lower tax rate, deductions, credits  etc.  Basically, unless you had Non-US sourced income during the period of your stay here  during 2019, it is always better taxwise to files as a resident

2. once you choose the resident for tax purposes status, you are not dual status  anymore -- unless you make the   first year choice  you would be a Non-Resident Alien for the year 2019 and thus file  your return on form 1040-NR or 1040-NR/EZ

3. As you can see form the  citations once you are a resident with SSN you may be eligible for the  Economic Impact  Payment.

Good Luck

[steevbe]

@pk Thank you so much for the insights!

One last bit still confuses me - If I make the first year choice:

a) am I considered dual status alien (non-resident Jan-Oct) and resident (Nov-December)?

b) am I considered resident alien for the whole year? In this case do I have to pay taxes to the US for my income when I was working in a different country (Jan-Sept) - although I paid my taxes in that country?

c) am I eligible for the stimulus check in both cases a) and b) or only if b) applies?

2. once you choose the resident for tax purposes status, you are not dual status  anymore -- unless you make the   first year choice  you would be a Non-Resident Alien for the year 2019 and thus file  your return on form 1040-NR or 1040-NR/EZ.

My understanding from the IRS website is that If I make first year choice I will be a dual status alien given that my "resident alien status" for 2019 begins on November 1st, so I am automatically non-resident for the rest of the year? Please help me understand this.

Thank you so much!

[pk]

@steevbe , the first year choice just pulls forward your status as a resident for tax purposes that is :

1. you become a Resident for tax purposes   from Nov 1st ( when you were admitted into the USA )  2019  instead of  April 2020 ( or thereabouts )

2. You  are dual status  person --- Jan 1st through  Oct. 31st  a Non-Resident Alien  and taxed  ONLY on your US sourced / connected  income  AND world income  from Nov 1st. through the end of the year.

3. You cannot file the request (  with all the info and as detailed on page 8 of the Publication 519) till you have met the substantial presence test -- April 2020

4. Whether you make the first year choice or not , your foreign income from Jan 1st through Oct. 31st 2019 is not taxed by the USA.

5.  You are not eligible to be treated as a resident for the whole year  -- see page 9 of the  pub 519

6. Technically you  would be a dual status  and  SHOULD file  form 1040-NR/EZ for the first part of the year        ( note that this not supported by TurboTax ) and file form 1040 for the rest of the year.    To achieve this  you either use the services of the tax professional, SprinTax ( TurboTax partner ) or similar but what you have to do  ( if you want to do it yourself ) -- Download the form 1040-NR/EZ from the IRS website, fill it out ( showing zero income  and therefore  this is just a formality ), then prepare  your form 1040 with TurboTax, print it out sign / date  and file by mail -- attach the  1040-NR/EZ in the back. On the first page of form 1040 -- print  by Hand  Dual Status Taxpayer.  Send the whole thing to the IRS  

7. from the eligibility requirements, you should be able to get the stimulus payment but I have no  idea if this will indeed bear out because IRS has not put out any rules  on this situation ( i.e. for dual status tax payers).  However, if you  do not  make the choice, you are clearly in-eligible, in addition to being taxed at a higher flat rate of 30%  ( on the plus side though your foreign income , if any during your presence in the USA, would be protected from the USA taxation )

Good Luck 

pk

[steevbe]

Thank you @pk  for the fantastic explanation.

I have a couple of simple questions related to your comments and it would be great if you can help me clarify them.

1) do I have to fill form 1040-NR fully as well, or just write 0 in income, as I didn't earn any income or US-connect income during there part Im NR?

2) Can I claim personal exemption for myself and my wife (NR alien, no income, but she has no SSN nor ITIN)? if yes, how much would that be?

• "Subject to the general rules for qualification, you are allowed exemptions for your spouse and dependents in figuring taxable income for the part of the year you were a resident alien." from IRS website.

3) If I don't make the 1st year choice and choose instead to be non-resident alien for the 2109 tax year -  the 30% flat rate apply only for passive income (in the US, I assume??) - but it doesn't apply for my direct income/salary.

This (below) is from the IRS website -please correct me if I misunderstood it.

Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income.

Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person.

FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.

thank you very much!

[steevbe]

Hi everyone,

Can somebody help us clarify these issues?

thank you!

[anirudhrap]

Hi @steevbe , 

Curious to learn how you navigated this situation ultimately?

My situation was very similar to yours - I was on F-1 visa (exempt individual) till 09/30/2020 and converted to H1-B status from 10/01/2020. I believe I qualify as a dual-status alien through the "first-year choice". However, when I filed tax returns for CY2020, I didn't at the time jump through these hoops and just filed a 1040-NR for the full year. In hindsight I've researched that I do indeed qualify as a resident for tax purposes from 10/01/2020. 

Q: Did you end up filing as a dual-status alien? If yes, did you receive the first and second EIP payments with your tax return? 

I'm looking to file an amended return for CY2020, and would truly appreciate your insights. Thanks in advance. 

[MarilynG1]

H1-B Visa holders are eligible for Stimulus Payments in certain circumstances, so you may want to Amend your 2020 return.

A person who is a qualifying resident alien with an SSN valid for employment is eligible for the payment only if he or she is a qualifying resident alien in 2020 and may not be claimed as a dependent of another taxpayer.

Click this link for more detailed info on H1-B Qualifications for Stimulus Payments.

[pk]

@anirudhrap , having read through your original post  and the response by @MarilynG1 , which I agree with, just wanted to point  out something in your post  ----- 

(a) presumably you entered USA with F-1 anytime within five calendar years of 2020  ( per your post that your  exempt status was valid  till  status adjustment).

(b) Since your status adjustment was on 10/1/2020,  you would have  Non-Resident Alien  for the whole of 2020.  And therefore you filed  a return on form 1040-NR;

(c) Granted that you could have exercised  your first year choice to be treated as a resident for tax purposes, -- because you met  1. at least 31 days  present in the USA,; 2. you would be meeting the substantial presence in 2021; 3. you were filing your return after having passed the  SPT ( Substantial Presence Test); 4. you wrere not a  Resident Alien for tax purposes in 2019; 5. have valid SSN for work

(d) You can therefore indeed amend your return ( as noted by @MarilynG1 ) to form 1040 , filing as a resident for tax purposes --- use TurboTax to prepare your amended return , attach  a copy of the original 1040-NR, marked  for reference only, attach a note requesting that you wish to be treated as a resident for tax purposes for the WHOLE year 2020.  I say the whole year because  the start of the year begins on the first day you were physically present in the USA .  Thus if you had any Non-US sourced income during the  whole of 2020, all of this would come under US tax purview  ( note that US-India  treaty conditions assertions may/ may  not apply , based on facts and circumstances in your particular case  ).

Does this help ?

[gocool]

Hi @steevbe , wanted to know how did you file at last. I'm in the same position now. It would be of great help if you let me know how did you do at last? Appreciate your help, thank you

[krishlalwani27]

I am in the same position - my F1 visa transitioned to H1-B in October 2021.

From a tax return standpoint, I was wondering which one would be better - to file as a non-resident for the entire tax year 2021, or make the first-year choice.

Hoping someone has an answer.

Cheers!

[Vanessa A]

Since TurboTax does not support the non-resident return, it would be best if you contact Sprintax.com to figure out which is the best option for you for 2021.