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Where Taxpayers and Advisers Meet

How does a US dual status tax return work?

Georgia Geordie
Posts: 2
Joined: Sat Jul 06, 2019 4:05 pm
Location: Atlanta, GA

How does a US dual status tax return work?

Postby Georgia Geordie » Sat Jul 06, 2019 5:27 pm

I am a long term US resident, but planning on quitting my job and returning to England for good later this year. I have been doing a bit of research on the web and although my finances are pretty simple, there are a couple of points I'm confused about.

I understand I will have to file a "dual status" return in the US for 2019 (hopefully my last ever US tax return). In theory, I could have no income in the USA after I leave and give up my green card when I'm back in the UK. I will close my US accounts and own no property. However, I have a modest former company pension in the USA of about $22,000 which I'd like to take as a lump sum, so I can have a clean break with the USA.

My question is how is gross income calculated for the dual status returns (which seems to be a non-resident return with a resident one attached to it)? It seems like the two are calculated separately according to the different sets of rules for non-resident and resident time periods. But do the gross incomes and various schedules then get added together? (so that the tax rates applied to my residency period, tests for deductions, or whatever else depends on calendar year income, would be based on the whole year's total income).

I've seen it stated apparently quite clearly that if I take the pension as a lump sum it wont be taxable in the UK, which is great. So all that would seem to matter is whether I withdraw the pension before or after I give up my green card. If I withdraw it after I am a non-resident, will that money be excluded from my gross income so far this year when US tax is calculated on the resident part of the return? If so, it seems like this year would be divided into two "mini-years" with lower tax owed in each part than if it were a single whole year and that sounds almost too good to be true!

thanks

darthblingbling
Posts: 262
Joined: Wed Aug 02, 2017 9:09 pm

Re: How does a US dual status tax return work?

Postby darthblingbling » Sun Jul 07, 2019 4:47 pm

Long term US legal resident...

I'd get a professional to do the last year for you and do some proper exit planning as there is the concept of "exit tax" and overall it may be complex and very messy if you go into this without proper planning.

David Trietel will likely pop up in this thread at some point offering his firms services. He's pretty much the voice on US tax in the UK.

Georgia Geordie
Posts: 2
Joined: Sat Jul 06, 2019 4:05 pm
Location: Atlanta, GA

Re: How does a US dual status tax return work?

Postby Georgia Geordie » Tue Jul 16, 2019 9:57 pm

Thanks for the advice. Fortunately (or unfortunately?) I’m not in that “exit tax” category. That would be a nice problem to have.

I will definitely be getting pro help to file that dual status return next year after I’m back in England. Far too complex for me, although I’ve managed my own returns online in the USA for most of my time here, as it was all pretty straightforward once I’d figured it out. The crucial decision for me right now is whether to pull the trigger immediately on that relatively small US pension. The processing time between requesting and getting the payout is a minimum 90 days, so I need to decide very soon if I want to take it this year before or after giving up my green card later this year.

The tax difference on the amount at stake in that sole decision is likely not worth a lot of professional advice just by itself. I just don’t want to be sitting in front of an accountant in London in 9 months time hearing “well it’s not the end of the world but what you should have done was...”.

Besides, I want to be dealing with an accountant in London about this (hence posting to a UK site for help) as that is where I’m going to be sorting out any long term loose ends from. I have made one inquiry here in Atlanta about this whole process but while the advice seemed to back up what I had researched myself, I had little confidence that I would get proper support once I was out of the country. So my focus is getting advice from the side of the pond where I can walk into a real office if needs be.

DavidTreitel
Posts: 204
Joined: Thu Aug 16, 2012 4:31 pm

Re: How does a US dual status tax return work?

Postby DavidTreitel » Mon Aug 05, 2019 6:22 pm

Geordie - the answer is not straightforward; the worst case scenario may help. It is 37% (the top Federal tax rate) plus a 10% penalty, plus State income tax.

Mairi S
Posts: 2
Joined: Sun Dec 30, 2018 1:09 pm

Re: How does a US dual status tax return work?

Postby Mairi S » Tue Aug 06, 2019 11:35 am

Many Thanks David,

I had a sharp intake of breath when I read your reply, but I'm better now. I think I can see where you're coming from and the worse case won't apply to me.

I presume the 10% you mention is an early withdrawal penalty, but I turn 60 this year so wont affect me (I already cashed in an IRA as soon as I could, in case the turbulent market turned sour just as I was about to exit the US). I'm not remotely close to paying top rate tax, even though this year will be my biggest ever gross income by some margin (but never to be repeated, which is why I'm focussed on not screwing up!). I expect my taxable income after deductions to be about 180, including that IRA, but excluding the pension, so I'll top out in the 32% bracket.

So the point of my question was to understand how the income numbers get added up (or if they do) in a dual status return, because it seemed to me that I'd be better off waiting until I was a non-resident in December (or Jan 2020) to take the lump sum pension, since it would be taxed by itself at a lower rate. Then I got to thinking it seemed too good to be true that you really get to file the equivalent of 2 part-year returns, since the total tax appears to be lower (to my way of thinking) than if I was a resident all year. But after reading the IRS instructions, I was still unclear about how the dual status return actually works, hence my question.

As I understand it, in 2020 when I'm back in England, I will have to file a non-resident return for 2019, with a resident return attached to it. But does the income from the resident part get added to the gross in the non-resident return, to get an overall gross in the 1040NR? Or are the resident and non-resident parts treated absolutely separately and the final tax bill is the sum of the tax computed for each?

thanks


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