Dual status - federal vs. state

[raggedyak]

Hi, I just moved to California from the UK. Arrived end of July 2023. Green card holder. My is a US citizen and California resident (she was living here already, we didn't move together). She claims the standard deduction when she files taxes.

Now that I am here, I am planning ahead to understand how we are best to file our taxes once 2023 ends.

I know I will have the option to make a first year choice to be treated as either:

1. dual status (so non-resident Jan-July 2023, then resident July-Dec 2023), or
2. a resident alien for the full year.

The benefit of electing to be treated as a resident alien for the whole year is that it means we could file jointly and claim the standard deduction. (Dual status individuals cannot take the standard deduction, and if filing jointly then both parties have to either take standard deduction or else itemize. Doesn't make sense for us to go that way financially.)

However, I earned income in the UK prior to arriving in the US, and if I elect to be treated as a resident alien for the full year of 2023, then that UK income will be subject to US tax.

From a federal point of view, I know that I have options with foreign tax credit or foreign earned income exclusion, as the UK income was already taxed in the UK and will be more than US taxes.

However, California also taxes on worldwide income, and there is no foreign tax credit option there. So it appears that if I elect to be treated as a resident alien for the whole year, my UK income earned before I arrive in the US will be taxed again by California.

My question: is it permitted to

• make the first year choice to be treated as a resident alien from a federal perspective, and claim foreign tax credits etc. but also
• file as a part-resident for California state taxes?

Or does the first year choice apply to both federal and state levels?

If it is permitted, how do I set this up in TurboTax so that I can try both options?

[tagteam]

@pk will likely be able to handle this.

[pk · Accepted solution]

@raggedyak , for the federal return for tax year 2023;

(a) first year choice   is really for tax  payers whom while not meeting the SPT during the  tax year but expects to meet this test during the following ( in addition to a few  other caveats .

(b) for your  particular case -- 

1. you are  married to a US citizen/ by the end of the year. 

2. you are dual status  for the year 2023 but at permanent resident  by the end of the year. 

3.  Under section 6013-6  you can indeed request to be treated as a resident alien for the whole calendar year.   This also means , as you have articulated in your post -- you can use  the standard deduction along with your spouse. ( article  551 at www.irs.gov )

4. your world income is included for purposes of US federal taxes.

5. since you were  not  a US resident till Jan 1st of 2023 ( by virtue of exercising  section 6013-6 ), your tax home would not meet the 340 out of 365 days  and thus you cannot exclude foreign earned income.  However , because US is taxing you on your earned income from UK  during the tax year 2023, you  have the option of either deducting  the taxes  ( if you itemize under SALT limit ) or claiming foreign tax credit.

For the California return:

 while you can file as married filing sep -- on form 540-NR or file 540 but exclude  you UK income as earned  outside the state,   ( your residency in CA started on  say  7/25/2023 and you earned income outside the state  01/01/2023 till 07/01/2023 , etc. ) and have been taxed by another  country.   I would suggest  for you to call the California  Franchise  Tax board and ask for help on this. They generally are quite helpful.

Is there more I can do for you ?

pk

[raggedyak]

Thank you

[raggedyak]

Thanks heaps pk, that's a great post and really useful. I will check with the California Franchise Tax Board as you suggest - didn't realise I could liaise with them directly.

If I get any further insight from them or another source I will post it back here.

Much appreciated - thanks again.