Navigating international tax systems is never simple, especially if you’re an NRI dealing with dual tax residency in the United States. This unique tax situation arises when you’re considered both a resident and non-resident of the U.S. within the same tax year—typically during the year of arrival or departure.
If you’re unsure what this means for your tax filings, obligations, and deductions, this guide breaks it down step-by-step to help you stay compliant and optimize your tax outcomes.
Table of contents
What is Dual Tax Residency?
Dual tax residency applies when an individual is treated as both a resident and a non-resident of the U.S. during the same tax year. This commonly occurs under two circumstances:
- You move to the U.S. mid-year, changing your status from non-resident to resident.
- You leave the U.S. mid-year, transitioning from resident to non-resident.
The result? You’re required to file taxes for each status separately, using different forms and tax rules for the respective periods.
Key Criteria for Dual Status in the U.S.
1. Substantial Presence Test
This IRS test determines whether you’ve spent enough time in the U.S. to be considered a resident. To qualify:
- You must be physically present in the U.S. for at least 31 days in the current year, and
- The total must be 183 days over the last three years, calculated as:
- All days in the current year
- One-third of the days in the previous year
- One-sixth of the days in the year before that
2. Green Card Holders
If you received a Green Card, you’re automatically treated as a U.S. tax resident from the date it was issued—regardless of the number of days spent in the U.S. Your resident status remains until it’s formally surrendered or revoked.
How Are Taxes Calculated During Dual Residency?
Resident Period
During this time, you’re taxed on your global income, just like U.S. citizens. This includes salary, business income, dividends, and interest earned both in and outside the U.S.
Non-Resident Period
Here, you’re only taxed on U.S.-sourced income, which falls into two categories:
- Effectively Connected Income (ECI) – Taxed at graduated rates
- Fixed or Determinable Annual or Periodical (FDAP) Income – Taxed at a flat 30% unless reduced by a treaty
Filing Requirements for Dual-Status Taxpayers
If you’re classified as dual-status, you’ll need to file two separate tax forms:
| Your Status on Dec 31 | Main Form to File | Attach Supporting Form |
|---|---|---|
| Resident | Form 1040 | Attach Form 1040NR |
| Non-Resident | Form 1040NR | Attach Form 1040 |
Important: Write “Dual-Status Return” on top of your main tax form. Dual-status returns must be physically mailed—you cannot e-file.
Common Mistakes to Avoid
| Mistake | Correct Approach |
|---|---|
| Claiming the standard deduction | Dual-status filers must itemize deductions |
| Filing jointly as dual-status | Must file separately; joint filing not permitted |
| Reporting only partial income | Must report worldwide income during resident period |
| Misusing tax treaty benefits | Confirm eligibility based on status and treaty |
Tax Planning Tips for Dual-Status NRIs
Leverage Tax Treaties
Many countries have treaties with the U.S. that help reduce or eliminate double taxation. These may offer:
- Lower tax rates
- Complete exemptions
- Credits for taxes paid abroad
Plan Your Move Strategically
Consider the timing of your move—entering or leaving the U.S. early or late in the year can significantly affect your tax liabilities. Keeping clear records of travel dates and financial transactions is essential.
Account for State Taxes
Some U.S. states have their own residency rules and may not recognize federal tax treaties. Be cautious if you maintain ties (e.g., property, driver’s license) to more than one state.
Understanding dual tax residency is essential for NRIs managing tax obligations in both India and the United States. Filing incorrectly or missing key deductions could lead to audits or financial penalties.
Whether you’re settling into life in the U.S. or planning your return to India, work with a qualified tax professional who understands both systems. This ensures compliance, reduces tax liability, and helps you make the most of any applicable treaty benefits.