To All Who Have Read My Postings On This Issue:

After further consultation with NATP, I am making some additional editing changes, which will be in bold red. I have also been referred to a website maintained by a CPA with extensive credentials and experience doing returns for resident and non-resident aliens. The website is www.thetaxguy.com. Based on information from that website, I am adding guidance below in bold green. His website has a forum which may be an excellent medium to discuss nonresident tax returns.

Over the past two weeks, I have answering multiple questions regarding how to submit tax returns for foreign nationals who, in 2004, were in a F-1 visa status, then converted to a H-1 visa.

My initial interpretation was that aliens who met the Substantial Presence Test were not in a dual-status tax year and therefore should:

1) File Form 1040/1040A/1040-EZ, claiming all income for the entire year and claim the standard deduction, if applicable.

2) File Form 8843 to account for their time under F-1 visa status.

3) NOT file Form 1040NR/1040NR-EZ to account for the income while under F-1 status.

However, I could not find clear guidance on such conversion in visa status in either the 2004 Instructions for Form 1040NR nor in the 2003 version of IRS Publication 519. Since I got multiple queries on this matter, and given the fact that the guidance was neither clear nor explicit, I realized I could not rely solely on my own interpretation of these publication. For this reason, I queried the National Association for Tax Professionals (NATP) on this matter and requested an expert opinion.

They could not cite specific guidance either, but rather gave an interpretation, which is cited verbatim below:

Our interpretation of Pub. 519 is if a taxpayer is a resident for part of the year and a nonresident for part of the year, this would be a dual status year. Taxpayers under an F-1 visa are considered nonresidents for that period. Therefore, based on the situation you described below, your client would be dual status in the first year her status changes and would not be allowed the standard deduction.

I read too much into NATP's original statement and assumed that two return were required. That is NOT the case.

First, to file under dual-status (as noted by Deepatrix below), you MUST meet either the Substantial Presence Test or the Green Card Test. To meet the Substantial Presence Test requires that your F-1 visa convert to H-1 visa no later than 2 July 2004.

If you meet the requirement to file dual status, you are in effect preparing two returns. The first one is as a resident alien, using Form 1040 to account for income earned while under H-1 visa status. Print the word "DUAL-STATUS RETURN" on this Form 1040. You cannot claim the standard deduction. You claim your personal exemption(s) on the Form 1040. The second return, as a nonresident alien, is Form 1040NR/1040NR-EZ to account for the income earned while under F-1 visa status and is actually a "dual-status statement" that will be filed as an attachment to your resident alien return (Form 1040). Print the words "Dual-Status Statement" on the Form 1040NR/1040NR-EZ.

Since you cannot claim the standard deduction on either return, you can claim itemized deductions on both returns. Use the appropriate Schedule A for each return. On the Form 1040NR Schedule A, you can claim charitable donations, state and local income taxes paid, casualty and theft losses, employee business expenses and miscellaneous expenses (as detailed on Form 1040NR's Schedule A). Note that if you live in a high-tax state such as New York, California or Massachusetts, it is very possible that the state and local income taxes paid will exceed the standard deduction. If you have only one W-2 for the entire year, you need to prorate the income to account for the time period on F-1 status. You were still be exempt from Social Security and Medicare taxes while you were under the F-1 visa status. If your employer withheld these taxes during that period in error, request a refund from your employer. If that is not possible, you can file Form 843 requesting a refund from the U.S. government.

The dual-status rule is different if you are from India, however. If you are an Indian citizen, you are eligible to claim the standard deduction on the Form 1040NR "DUAL-STATUS Statement" up to the amount of income earned while on the F-1 visa, but not more than $4,850. Example: The income earned under F-1 is $2,500. You can claim a standard deduction of $2,500. Second Example: The income earned under F-1 is $10,000. You can claim a standard deduction of $4,850. Since you are claiming the standard deduction, you CANNOT claim any itemized deductions on either the Form 1040NR "DUAL-STATUS Statement" nor on the Form 1040. For this reason, you should prepare the returns BOTH WAYS (claiming the standard deduction on Form 1040NR or claiming itemized deductions on both returns) and use the one which produces the least amount of taxes owed.

File Form 8843 to account for your F-1 visa status. This should be the last time you need to file this form.

Be sure to sign the Form 1040. Mail all documents in the same envelope to the following address:

Internal Revenue Service Center
Philadelphia PA 19255

Now, if you do NOT meet either the Substantial Presence Test or the Green Card Test, this is NOT a dual-status year for you. You are considered a nonresident alien for the entire year for income tax purposes, even though your visa status changed from F-1 to H-1 sometime after 2 July 2004 and even though you began paying Social Security and Medicare taxes when you converted to H-1 visa status. You should file JUST the Form 1040NR or Form 1040NR-EZ. If you were eligible, as an Indian citizen, to claim the standard deduction, you can do so again for 2004. When you file for 2005, you will be considered a resident alien and you will not have to worry about the dual-status issue for 2005.

I apologize for the confusion on this issue.

vasant

Thanks for ur reply... but this is even more confusing...According to your reply we should file 2 forms. But IRS website states something different..

================================================== ========
Resident vs. Non Resident

The U.S. income tax return you must file as a dual-status alien depends on whether you are a resident alien or a nonresident alien at the end of the tax year.

Resident at End of Year

You must file Form 1040, U.S. Individual Income Tax Return if you are a dual-status taxpayer who becomes a resident during the year and who is a U.S. resident on the last day of the tax year. Write "Dual-Status Return" across the top of the return. Attach a statement to your return to show the income for the part of the year you are a nonresident. You can use Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents as the statement, but be sure to mark "Dual-Status Statement" across the top.

Nonresident at End of Year

You must file Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents if you are a dual-status taxpayer who gives up residence in the United States during the year and who is not a U.S. resident on the last day of the tax year. Write "Dual-Status Return" across the top of the return. Attach a statement to your return to show the income for the part of the year you are a resident. You can use Form 1040, U.S. Individual Income Tax Return as the statement, but be sure to mark "Dual-Status Statement" across the top.

AtlantaTaxExpert

Vasant:

I understand your confusion. Remember that I stated that neither the Pub 519 nor the Form 1040NR instructions properly addressed the F-1 to H-1 conversion process.

The instructions you cite below deal with the circumstances of dual-status aliens coming into the U.S. (and having to file Form 1040) or leaving the U.S. (and having to file Form 1040NR).

Remember that the people under the F-1 visa are considered nonresident aliens, but in fact are physically located in the U.S. and therefore have to file a Form 1040NR or 1040NR-EZ to account for any income they earn while they are under the F-1 status. That income is subject to U.S. income taxes, but under different rules and at a different tax rate than what they pay as a resident alien.

Given those circumstances, I see no choice but to file two separate returns.

vasant

AtlantaTaxExpert:

If we file 2 forms, we can take personal exemption + Standard deduction for F-1 status and again personal exemption + Itemized deduction for H-1 status. Now isn't that too much deduction?

deepatrix

for all those who fail the substantial presence test - you are non resident the whole year... go to figure one in Pub 519..

if you are non resident - just file 1040 NR or NR EZ... and claim std. deduction if you are indian.

Dual status happens only if you pass the test and you had a F1 or non resident period

If you are dual status... you cannot claim std. deduction... even the instructions on 1040 NR says this.

next if you see the example for a dual status return in Pub 519... the NR is just a statement of how long you were in the US and how much you earned as non resident...

your W2 has total wages and social security wages teh difference is what you earned as non resident.

you carry over this amount in total to the total wages on form 1040 ... and do itemized deductions and complete the tax form....

for people who don't have much to deduct you may owe the IRS money...

vasant

so does that mean we can get all the social security back ?

deepatrix

does anyone know anything about this?

this is copied from Pub 519

Residency starting date under substantial presence test. If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year. However, you do not have to count up to 10 days of actual presence in the United States if on those days you establish that:

You had a closer connection to a foreign country than to the United States, and

Your tax home was in that foreign country.

See Closer Connection to a Foreign Country, earlier.

In determining whether you can exclude up to 10 days, the following rules apply.
You can exclude days from more than one period of presence as long as the total days in all periods are not more than 10.

You cannot exclude any days in a period of consecutive days of presence if all the days in that period cannot be excluded.

Although you can exclude up to 10 days of presence in determining your residency starting date, you must include those days when determining whether you meet the substantial presence test


----if we are on F1 and present in the US as of Jan 1st 2004 are we resident and file only 1040?

msrabc

I really appreciate your help to all of us. I qualify for substantial presence test as my h1 started on Apr 1st 2004. So as I understand,
I need to file 1040NR-EZ for income for first 3 months on F1 status and a 1040NR for income for next 9 monts on H1 status. I can not cliam any standard exemptions. I have few questions.

1.Can I claim personal exemption twice (once in each form)?

2.Can I claim itemized deductions (donations to charity etc..) twice ?

3. I can't claim deduction because of US-India tax treay at all, not in any form. ?

Thanks once again,

MSR

AtlantaTaxExpert

Msrabc:

Read my posting again, especially the red parts.

This is a dual-status year for you. You must file Form 1040 (not Form 1040NR/1040NR-EZ) for the last nine months you were under H-1 visa. You prepare the Form 1040Nr/1040NR-EZ as a "DUAL-STATUS statement" to account for income earned while under F-1 visa status.

1) You claim your personal exemption only once, on the Form 1040.

2) You do claim the itemized deductions you incurred during the specific period. Example: The state income taxes withheld during the F-1 visa period are claimed on the Form 1040NR Schedule A. The state income taxes withheld during the H-1 visa period are claimed on the Form 1040 Schedule A. If you only have one W-2 which covers both period, prorate the tax withholding (one-fourth on the Form 1040NR Schedule A, three-fourths on the Form 1040 Schedule A). So for charitable deductions, if you gave $200 in January and $2,000 in July, you claim the $200 on the Form 1040NR Schedule A and the $2,000 on the Form 1040 Schedule A.

3) You cannot claim the standard deduction on either form. Because you are "dual-status", use of the standard deduction is prohibited, even though you are an Indian citizen.

msrabc

Thanks a lot. Being a newbie this is exactly what I wanted. THanks once again.