[scolar]

Hi there,

I'm on H1B, my wife and son are on H4. We are in US (California) starting Oct 12, 2005. I have several questions:

1. I filed an extension of time. As I understand, after 5th of June I will pass substantial presence test (SPT) in 2006, and therefore can file 1040A for 2005 under first-year choice, correct?

2. There is no way to claim my son as dependent for 2005, right?

3. My W-2 shows gross income about $16K and about $3K of them were subtracted as taxes. When I have entered all this data int TurboTax it showed that all this amount will be refunded. Is there any error? In particular, passing SPT means residence for part of year - should my income be scaled or something like that?

4. Related to the previous question: is this true that filing 1040-NR I will not receive any refund, but filing 1040A I will receive significant amount of money back?

5. If yes: by some reasons I may need to file my tax return before June. Is it possible to file 1040-NR right now, and then file 1040A in June explaining that I want to be treated as resident under first-year choice? Will IRS refund money in this case?

6. My wife and son do not have SSN/ITIN. Am I right, that I should attach their W-7 forms to federal taxes, wait for ITINs and only after that file state taxes?

Thanks in advance,
Dmitry.

[taxsearcher]

I'm confused as to what you were doing before you had the H1. Were you say F1 changing over to H1?

If you don't pass the SPT for 2005 and you don't have a green card then you are a non-resident and should file as such.

You have an election available to you to that can change this if you want to file for an extension and then wait until you pass the BPT for 2006. Once you pass the SPT in 2006 you may make the first year election. This will result in you becoming a dual status alien for 2005.

Now, if your wife also makes the election to become a dual status resident, then you have a further election you may make by virtue of each being married to a resident alien at year end. This would require you to file a MFJ return and be resident for the entire year.

The catch is that if you file as a resident all year you must report your worldwide income (you can claim a tax credit for foreign tax paid). Depending on your circumstances this might not be the best thing to do or it might work well.

So the short answer is that there are several options available to you in your particular case.

[scolar]

I'm confused as to what you were doing before you had the H1. Were you say F1 changing over to H1?

If you don't pass the SPT for 2005 and you don't have a green card then you are a non-resident and should file as such.

You have an election available to you to that can change this if you want to file for an extension and then wait until you pass the BPT for 2006. Once you pass the SPT in 2006 you may make the first year election. This will result in you becoming a dual status alien for 2005.

Now, if your wife also makes the election to become a dual status resident, then you have a further election you may make by virtue of each being married to a resident alien at year end. This would require you to file a MFJ return and be resident for the entire year.

The catch is that if you file as a resident all year you must report your worldwide income (you can claim a tax credit for foreign tax paid). Depending on your circumstances this might not be the best thing to do or it might work well.

So the short answer is that there are several options available to you in your particular case.

Thank you for the reply.

My situation is the following: we moved to US from Russia in October. So there was not any F1 change to H1.

There is some confusion in the rule "being married to a resident alien at year end". Does the word "resident" mean "tax resident" or "lawful permanent resident"?

In other words, is it correct that couple of dual-status aliens can file a MFJ as residents for the entire year, use standard deduction etc. as they were residents?

And the last question: if I already filed 1040NR can we file 1040X and 1040A MFJ and make first-year choice?

[AtlantaTaxExpert]

Scolar:

TaxSearcher's guidance is very good. My input will only supplement it somewhat.

Your quote:

In other words, is it correct that couple of dual-status aliens can file a MFJ as residents for the entire year, use standard deduction etc. as they were residents?

Yes, that is exactly what it means. Clearly it is to your advantage to file MFJ so you can file as resident aliens. This option is available to you only if you are married, and should allow you to claim your wife's personal exemption and standard deduction, as well as your own personal exemption and standard deduction, PLUS your child's personal exemption.

Combined, that exempts ALL of your U.S.-based earned income for 2005. If you made any money in Russia, you must claim that income as well, but the combination of the Foreign Tax Credit and the Foreign Income Exclsuon will probably take care of any tax liability from that income as well.

As for Item #6 of your original posting, yes, you need to complete the W-7 for both your wife and child, then attach it, along with notarized copies of their passports, to the federal tax return and mail it to the address on the W-7 instructions. The IRS will insert the ITIN on the tax return, process it, then send you the ITINs by letter. Then (and only then) will you file your state tax return with their ITINs. It is likely you will get all your withheld state income taxes as well.

You will NOT qualify for the Child Tax Credit nor the Earned Income Credit (your child did not live with you long enough in the U.S.).

[taxsearcher]

Scolar,

See Publication 519 from the IRS website for more details Internal Revenue Service

As ATE said, it is tax residency that is relevant. You will need to make 2 elections and file MFJ to qualify. And you must report your worldwide income.

You will qualify for the foreign tax credit but not for the foreign earned income exclusion.

[scolar]

ATE,

Thanks for the clarification. One more thing: can I file 1040NR-EZ right now, and then in June file 1040X + 1040A + First-year choice statement + W-7?

Thanks,
Dmitry

[scolar]

TaxSearcher,

Thanks for your replies, they really help. Can you tell me something on item 5 of original posting?

Dmitry.

[taxsearcher]

Scolar,

If you decide you want to go the resident path, then you need to file for an extension. I have copied some explanatory material from the IRS below. Note that if you now owe any taxes then you need to pay them when you file for an extension. Once you qualify as a resident in 2006 (under the SPT) then you may file as a resident for 2005 with the applicable elections.

You need to make two elections.

1. the first year election

2. the election to file as a resident alien with your spouse

You can get details on the way to make the election from here:

Publication 519 (2005), U.S. Tax Guide for Aliens

*********************************************
Statement required to make the first-year choice. You must attach a statement to Form 1040 to make the first-year choice. The statement must contain your name and address and specify the following.
That you are making the first-year choice.

That you were not a resident in 2004.

That you are a resident under the substantial presence test in 2006.

The number of days of presence in the United States during 2006.

The date or dates of your 31-day period of presence and the period of continuous presence in the United States during 2005.

The date or dates of absence from the United States during 2005 that you are treating as days of presence.

You cannot file Form 1040 or the statement until you meet the substantial presence test for 2006. If you have not met the test for 2006 as of April 17, 2006, you can request an extension of time for filing your 2005 Form 1040 until a reasonable period after you have met that test. To request an extension to file until October 16, 2006, use Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. You can file the paper form or use one of the electronic filing options explained in the Form 4868 instructions. You should pay with this extension the amount of tax you expect to owe for 2005 figured as if you were a nonresident alien the entire year. You can use Form 1040NR or Form 1040NR-EZ to figure the tax. Enter the tax on Form 4868. If you do not pay the tax due, you will be charged interest on any tax not paid by the regular due date of your return, and you may be charged a penalty on the late payment.

Once you make the first-year choice, you may not revoke it without the approval of the Internal Revenue Service.

[taxsearcher]

Also note that you might be overpaying (now you must pay as a NR when you file for an extension) but that you will possibly get a refund if the resident return ultimately gives you the better result.

[AtlantaTaxExpert]

Taxsearcher's guidance is excellent. I have nothing to add.

[dhoon]

But what if I already filed 1040 before beign resident status?

Is it OK if I do following
File 1040x + 1040NR before 17 April

Then once I get the resident then
File 1040x+1040 to get the refund?

Thanks

[AtlantaTaxExpert]

Dhoon question answered via email.