# Move to US. First year dual-status resident alien. Forms 1040/2555/1116



## markych

Hello! 
This great forum has lots of sophisticated cases but seems that there's always a special one 
There are not so many tax specialists who understand ins and outs of tax refund for dual-status so I'd better try to understand different filing options with help of this respected forum before actually start filing the best option with a "tax specialist".

My apologies for too long read below. I just tried to provide as many details as I can along with my understanding of the topic and all questions I have at the moment.
So, thank you all in advance for all your great effort and help! 

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_So, our situation is as follows. 
We are married couple moved from Russia to US on Oct 10, 2016 and it was our first workday here in US. So, we had 
- only foreign income from Jan 1,2016 to Oct 7, 2016
- only US income from Oct 10, 2016 to Dec 31, 2016

We both had business trips to US being on russian payroll:
- My wife spent something like 3 months (May 12, 2016 - Aug 20, 2016)
- My business trip was around 1.5 months (Jul 4, 2016 - Aug 20, 2016)

None of us is US citizen, we are on L1 visa. 

With above said on Dec 31, 2016 our tax status was
- my: non-resident alien
- wife's: resident alien (by substantial presence test)
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So, seems like we have two filing options:
Option 1: 1040 Married filing jointly
Option 2: 1040NR + 1040

Option 2 means we can claim only $6300 of $12600 standard deduction amount as I cannot claim one if treated as non-resident.

Option 1 requires us to file both US and foreign income. And I do not fill comfortable about our options on filing foreign income. And I would prefer to choose one which provides more in $ refund.

If I read IRS pubs and instructions in a right way our options related to foreign income are:

1. FIC, form 1116
2. FEIE, form 2555
3. combination of both

*[1. FIC, form 1116]*
I think, i don't have many questions on 1116 as it is more or less straightforward. The only thing I do not like about it is that we will get nearly $0 refund. That is weird due to the fact that we were withheld too much US taxes by employer. Basically we had only 3 months of US income but were withheld taxes as if we had full 2016 year wages. We could have few thousands $ refund without filing foreign income.

*[2. FEIE, form 2555]*
Now, to the form 2555 itself.

Important question here is - *are we at all eligible to file form 2555 (FEIE)? *
From dates perspective we are ok. We both can satisfy Physical Presence Test with 330 days in 12-months periods starting in 2015 and ending in 2016.
Why I am in doubt is because of the fact that both our Physical Presence Test periods start in 2015 and we were not resident aliens in 2015 as we may only be for full 2016 (if I will make such election for first year). Does this really matter for Physical Presence Test or it doesn't as the period ends in 2016 where we both can be treated as residents?

Do I get it right that for form 2555 we cannot not count days we were on a business trip in US as days in foreign country? That means we cannot file a part of foreign income for a periods of business trips to US even if source of income was outside of US, correct?

*What about Bona Fide Test?* Am I right that we cannot satisfy it as we should have been residing in Russia for the whole 2016 no matter that we were there any year before 2016 being US non-resident aliens?

*[3. combination of both 2555 and 1116]*
And the last thing... I would consider form 2555 or mix of 2555/1116 but I have some doubts...
First, I would like to make sure that mix of 2555 and 1116 is a possible option. Is it?
*Can we exclude all possible foreign income with form 2555 and file the rest of it on form 1116?*


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## Bevdeforges

You need to take a look at Publication 519 and the section of the IRS website on Nonresident aliens: https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens

If you file jointly, you can only exclude your foreign EARNED income (i.e. salary or similar) using the form 2555. And you can only claim a tax credit on the form 1116 for income taxes paid to a foreign tax authority. (The IRS can be kind of picky about which taxes are income taxes.) The other thing is that, for the form 1116, you need to divide your income into "earned income" (salary, again) and "passive income" - i.e. income from investments.

It should be OK to claim the physical presence test based on 12 consecutive months outside the US, even if your 12 month period begins part-way through the year - so October 2015 to October 2016. 

Officially speaking, if you were in the US on a business trip, then yes, you have to apportion your income during those days and cannot count it as "foreign" income.
Cheers,
Bev


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## markych

Bevdeforges, thank you for reply!

IRS publications do not have answers/examples when it comes to some tricky nuances. I've read 519, 514 and 54 and still have unanswered questions.
How do you think is it a viable option to separate foreign income between 2555 and 1116?
We have only salary/wages income so it makes things simpler.
Reason why 1116 form do not work well in our case is that foreign income to total income ratio is pretty low, like 0,7. So we cannot use all taxes paid in Russia to cover US taxes on combined income.


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## Bevdeforges

> Reason why 1116 form do not work well in our case is that foreign income to total income ratio is pretty low, like 0,7. So we cannot use all taxes paid in Russia to cover US taxes on combined income.


And frankly, that's how it is designed to work. I have something of the same problem because I'm married to an NRA and all taxes are assessed jointly here in France. His income is considerably higher than mine and so I can only claim a small portion of the taxes paid against US taxes.

To be perfectly honest about it, the simplest and easiest way is going to be to simply exclude the foreign earned income and pay what you have to on the rest. The first year of filing, either on entry to or departure from, the US always has some issues like this. As to whether to file jointly or separately, you'll have to run the numbers and see which outcome is the least expensive for the couple as a whole.

Just remember that there is no one "right" or "wrong" way to fill out the forms. You do a best effort and unless there is something glaring that they want to follow up on, you're done with it.
Cheers,
Bev


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## Moulard

Potentially you could claim to meet the Bona Fide Residency test for the 2555.

Consider the following questions...

Have you kept a home there?
How long is your intended residence in the US?
What is the nature of your Intra-Company transfer?

The L-1 Visa is a dual intent visa. Technically I believe it is a non-immigrant visa, but unlike other non-immigrant visas does not require you to maintain a foreign residence. Plus it is a class of visa that can eventually apply for a green card.

If you have basically sold up everything with the intention of immigrating to the US on a long term basis, you won't meet the test. 

If you have kept a foreign home, and see this as a short term intra-company transfer. and if your contract terms don't suggest it is a permanent role, then you might well be able to claim that for 2016 you were still a bona fide resident of Russia.

Another thing to bear in mind is that if you exclude income using the 2555, you must also proportionally reduce any of your deductions and credits. This includes foreign tax credits.

It is definitely possible to file both a 2555 and a 1116. 

Two common reasons why you might want to file both (there are bound to be others):

You have foreign wages above the 2555 exclusion limit 
You have foreign passive income that cannot be excluded (and foreign taxes have been paid on it)

As to which way to file, that is up to you. You have already indicated that you don't feel comfortable filing jointly using Section 6013. That kind of forces your hand a bit.

What I can say, is that if Russian taxes are lower than US taxes generally it will be more tax effective to exclude the income if you can. 

Excluding foreign earned income will reduce your AGI and thus your taxable income. But it will also reduce the amount of foreign work related deductions and credits you can claim.


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## markych

Bevdeforges said:


> To be perfectly honest about it, the simplest and easiest way is going to be to simply exclude the foreign earned income and pay what you have to on the rest. The first year of filing, either on entry to or departure from, the US always has some issues like this. As to whether to file jointly or separately, you'll have to run the numbers and see which outcome is the least expensive for the couple as a whole.
> 
> Just remember that there is no one "right" or "wrong" way to fill out the forms. You do a best effort and unless there is something glaring that they want to follow up on, you're done with it.
> Cheers,
> Bev


You are right! And I do really understand that nothing can help more than running the numbers. I just wanted to skip combinations or options I am not eligible for 
I actually did run ~ten different variations yesterday including different filing options with or without 1116/2555 and mix. Actually, it seems like, as you've said, simple exclusion with 2555 is the best in terms of refund amount in my case. And I am ok to skip 1116 as I do not expect to carry forward unused credit at least next year.
I want you to look to the very end of this post if you please. I got negative foreign taxable income while mixing 2555 with 1116...



Moulard said:


> Potentially you could claim to meet the Bona Fide Residency test for the 2555.
> 
> Consider the following questions...
> 
> Have you kept a home there?
> How long is your intended residence in the US?
> What is the nature of your Intra-Company transfer?
> 
> The L-1 Visa is a dual intent visa. Technically I believe it is a non-immigrant visa, but unlike other non-immigrant visas does not require you to maintain a foreign residence. Plus it is a class of visa that can eventually apply for a green card.
> 
> If you have basically sold up everything with the intention of immigrating to the US on a long term basis, you won't meet the test.
> 
> If you have kept a foreign home, and see this as a short term intra-company transfer. and if your contract terms don't suggest it is a permanent role, then you might well be able to claim that for 2016 you were still a bona fide resident of Russia.


That is interesting idea! It sounds like “Closer Connection to a Foreign Country” from pub.519, but I cannot find any connection of this approach to Bona Fide Resident Test.
Would you please suggest why do you think it should work?
Yes, I still have my permanent home and my contract is only one year but prolongable. 



Moulard said:


> Another thing to bear in mind is that if you exclude income using the 2555, you must also proportionally reduce any of your deductions and credits. This includes foreign tax credits.


I am not sure I follow here... Do you mean I cannot fill 1116 credit for the amount of foreign income I have excluded with 2555? That is ok.
Or you maybe say that I need to reduce things like standard deductions in proportion with days of my business trip to US excluded from my foreign income? That is something I never see mentioned. Only proportion I am aware of is that calculated explicitly in form 1116 for standard deduction. However even in this case form 1040 still contain full amount of standard deductions. At least I didn't noticed special comments/instructions for form 1040 line 40.




Moulard said:


> It is definitely possible to file both a 2555 and a 1116.
> 
> Two common reasons why you might want to file both (there are bound to be others):
> 
> You have foreign wages above the 2555 exclusion limit
> You have foreign passive income that cannot be excluded (and foreign taxes have been paid on it)
> 
> As to which way to file, that is up to you. You have already indicated that you don't feel comfortable filing jointly using Section 6013. That kind of forces your hand a bit.
> 
> What I can say, is that if Russian taxes are lower than US taxes generally it will be more tax effective to exclude the income if you can.
> 
> Excluding foreign earned income will reduce your AGI and thus your taxable income. But it will also reduce the amount of foreign work related deductions and credits you can claim.


My reason for trying to mix 2555 and 1116 is actually the third one 
I am not over the limit with foreign wages but I cannot use them all as my eligible foreign days/366 ratio is a bit lesser than needed. So 101300 x foreign days/366 gives only part of my foreign income and I wanted to try to use the rest with 1116. It is ok to do this kind of trick?
I didn't feel comfortable to file jointly as I worried that it will not yield good result.
However, joint return with 2555 seems as the best option. And thankfullyray: I have nothing to claim as foreign work related deduction or credits.
Russian income taxes are lower (13%) until you are tax non-resident (>183 days in calendar year abroad) then it bumps to 30% for the whole calendar year.



By the way, I got to odd results filling joint 1040 with 2555 and 1116. When I got to line 7 of 1116, I had standard deduction proportion which is actually a ratio of total foreign income (including amount excluded with 2555) to total foreign + US income (also incl. excluded 2555 amount) greater than foreign income minus 2555 amount.
I am not sure whether I should continue with negative taxable foreign income or just skip filing 1116 at all. I tried to find any miscalculations but failed 
I am really ok to skip as it becomes like -$55 of foreign tax credit, but I'd rather know is it at all correct as there are no instructions like 'if zero or negative stop filing and fill 0 in line 48 of 1040'


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## Moulard

markych said:


> I am not sure I follow here... Do you mean I cannot fill 1116 credit for the amount of foreign income I have excluded with 2555? That is ok.


Correct. You should read Publication 514.

You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U.S. gross income.

If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or ac*crued on these wages.

If your earned income is above the foreign earned income exclusion you can only take a tax credit for that portion of your foreign earned income that you have not excluded. Pub 514 has a worked example , but the idea is that if you exclude 75% of your foreign earned income using 2555 only 25% of the foreign taxes can be used for a tax credit. You must reduce the the foreign taxes you paid by 75% on Line 12 of Form 1116.

The same also applies with itemised deductions. In the example above. If you had $100 of itemised foreign work related deductions, you could only itemise $25 of it. The other $75 could be used in the Foreign Earned Income Tax Worksheet.



markych said:


> I am not over the limit with foreign wages but I cannot use them all as my eligible foreign days/366 ratio is a bit lesser than needed. So 101300 x foreign days/366 gives only part of my foreign income and I wanted to try to use the rest with 1116. It is ok to do this kind of trick?


Yup. If your Foreign earned income is above the exclusion amount (either the full amount or the proportional amount based on the number of days) then you can use Form 1116 to get a tax credit on the remainder. But you do have pro-rate things. 

So again, lets say, for example your foreign earned income was USD 120,000 and you were only able to exclude USD 90,000 because of the fraction on 2555 line 39.

You have exclude 75% of your income. Using your example of 13% taxes, say you paid tax = 15,600 the maximum tax credit you could claim would by 25% of that amount or 3,900. On Form 1116 Part II you would put the full amount of 15,600 and on Line 12 you would reduce it by 11,700 to end up with a total on line 14 of 3,900.

Hope that explanation makes sense.


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## Moulard

markych said:


> I am not sure whether I should continue with negative taxable foreign income or just skip filing 1116 at all. I tried to find any miscalculations but failed
> I am really ok to skip as it becomes like -$55 of foreign tax credit,...



I think you are doing a miscalculation somewhere. You should not be able to get a negative foreign tax credit if you are filling things out correctly.


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## markych

Moulard said:


> Correct. You should read Publication 514.
> 
> You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U.S. gross income.
> 
> If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or ac*crued on these wages.
> 
> If your earned income is above the foreign earned income exclusion you can only take a tax credit for that portion of your foreign earned income that you have not excluded. Pub 514 has a worked example , but the idea is that if you exclude 75% of your foreign earned income using 2555 only 25% of the foreign taxes can be used for a tax credit. You must reduce the the foreign taxes you paid by 75% on Line 12 of Form 1116.
> 
> The same also applies with itemised deductions. In the example above. If you had $100 of itemised foreign work related deductions, you could only itemise $25 of it. The other $75 could be used in the Foreign Earned Income Tax Worksheet.
> 
> 
> 
> Yup. If your Foreign earned income is above the exclusion amount (either the full amount or the proportional amount based on the number of days) then you can use Form 1116 to get a tax credit on the remainder. But you do have pro-rate things.
> 
> So again, lets say, for example your foreign earned income was USD 120,000 and you were only able to exclude USD 90,000 because of the fraction on 2555 line 39.
> 
> You have exclude 75% of your income. Using your example of 13% taxes, say you paid tax = 15,600 the maximum tax credit you could claim would by 25% of that amount or 3,900. On Form 1116 Part II you would put the full amount of 15,600 and on Line 12 you would reduce it by 11,700 to end up with a total on line 14 of 3,900.
> 
> Hope that explanation makes sense.


Yep! That's what I did in accordance with the explanation for line 12 of 1116. 
I didn't come across any specific note on such case. That's why I just pessimistically guessed that I may not fill 1116 for the rest of foreign income and taxes which I cannot exclude with 2555 due to number of days. However you kind of assured me that there is a nothing wrong in my specific case and I actually can do mix of 2555 and 1116.




Moulard said:


> I think you are doing a miscalculation somewhere. You should not be able to get a negative foreign tax credit if you are filling things out correctly.


This is how I came to this. 

Line 1a contain foreign income adjusted with whatever I have excluded with 2555. Let's say it is $5000. 
Line 3a has $12600 as I file jointly for the whole 2016. I am not able to find anything about proration of standard deduction amount due to excluded amount or number of days or something alike. Only about itemized deduction or proration if I file more than one 1116 to cover different income types (general, passive etc.)
Line 3a will be the same $12600 (no other deductions)
Line 3f is a ratio of 3d/3e which are grand total foreign income and grand total income
Let's say it is 0.7. As you can see it does not depend on the foreign income amount excluded.
So, I will have Line 3g = $8820
I have nothing for sections 4 and 5 so Line 6 will be $8820
Here we are. Line 7 = Line 1a - Line 6 = $5000 - $8820 = $-3820
Going forward, Line 15 will be the same $-3820 and so on...

Am I missing some crucial point in all these calculations?


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## markych

markych said:


> This is how I came to this.
> 
> Line 1a contain foreign income adjusted with whatever I have excluded with 2555. Let's say it is $5000.
> Line 3a has $12600 as I file jointly for the whole 2016. I am not able to find anything about proration of standard deduction amount due to excluded amount or number of days or something alike. Only about itemized deduction or proration if I file more than one 1116 to cover different income types (general, passive etc.)
> Line 3a will be the same $12600 (no other deductions)
> Line 3f is a ratio of 3d/3e which are grand total foreign income and grand total income
> Let's say it is 0.7. As you can see it does not depend on the foreign income amount excluded.
> So, I will have Line 3g = $8820
> I have nothing for sections 4 and 5 so Line 6 will be $8820
> Here we are. Line 7 = Line 1a - Line 6 = $5000 - $8820 = $-3820
> Going forward, Line 15 will be the same $-3820 and so on...
> 
> Am I missing some crucial point in all these calculations?


Just forgot to mention that negative amount @line 7 comes before I even get to Part II related to foreign taxes which I definitely prorate on line 12


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## Moulard

If you do a internet search for "form 1116 comprehensive example" you can find a good worked example that includes US and Foreign earned income as well as US and foreign passive income.

I would suggest using it as a way to validate if your calculations are correct.


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## markych

Moulard said:


> If you do a internet search for "form 1116 comprehensive example" you can find a good worked example that includes US and Foreign earned income as well as US and foreign passive income.
> 
> I would suggest using it as a way to validate if your calculations are correct.


Thank you! I believe you are referencing to publication 514 in some year 2000 edition.
Something like this - http://www.unclefed.com/IRS-Forms/2001/HTML/p51410.html
It is really great and comprehensive. Why IRS removed (or moved?) these examples in the latest revision of the pub. 514?... Anyway the difference between examples and my case are that I do not itemize and I do not have foreign income in other categories.
So only one form 1116 I may file.

I just read pub. 514 once again, specifically "Deduction not definitely related" section.
It might have been written in a bit more comprehensive way.. 



> *Deductions not definitely related.* You must apportion to your foreign income in each separate limit category a fraction of your other deductions that are not definitely related to a specific class of gross income. If you itemize, these deductions are medical expenses, general sales taxes, and real estate taxes for your home. If you do not itemize, this is your standard deduction. You should also apportion any other deductions that are not definitely related to a specific class of income, including deductions shown on Form 1040, lines 23–35; or Form 1040NR, lines 24–34.
> 
> The numerator of the fraction is your gross foreign income in the separate limit category, and the denominator is your total gross income from all sources. For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income.


Would you please tell me that I got it right that the quote above says I must use only a fraction of itemized deduction OR standard deduction, if I do not itemize, and that fraction defined in the second paragraph of that section?
If so then I cannot interpret it any other way and thus believe my calculation is correct. I just need to skip trying to use 1116 for the remainder of foreign income after exclusion.. 


Would you please tell your opinion on my previous question about Bona Fide Resident Test?


> That is interesting idea! It sounds like “Closer Connection to a Foreign Country” from pub.519, but I cannot find any connection of this approach to Bona Fide Resident Test.
> Would you please suggest why do you think it should work?
> Yes, I still have my permanent home and my contract is only one year but prolongable.


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## Moulard

I suggest you take a look at Pub 54.

https://www.irs.gov/pub/irs-pdf/p54.pdf

Bona Fide Residency is difficult to prove one way or the other, because it is about intent. 

Ultimately its not me who you need to convince. It will be the IRS if the question you on it...


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## Bevdeforges

Bona fide residence is less difficult to "prove" (should you have to) if you are claiming it for a country in which you are a citizen (and in this case, the country you are coming FROM rather than just moving TO). Though in general, I've seen very little to suggest than the IRS will challenge which option you claim (physical presence vs. bona fide residence) unless there is some major difference in your ability to meet the requirements. 
Cheers,
Bev


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## Moulard

It is the same point that Bev makes (re difficult to prove) that leads me to suggest that if you are trying to game the system, then the fact that you are in the US on a non-immigrant visa may be something you can use to your advantage.

As Bev says, you are not likely to be challenged, but if you are you need to have a consistent story to tell. Having a home in Russia, a short term contract in the US etc. can support that story.


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## Bevdeforges

Whoa, I'm not trying to suggest that anyone is trying to game the system here. As a long-time resident of Russia up until the point where the OP decided to move to the US, it icould be perfectly legit to claim bona fide residence in Russia - at least for that final part-year, assuming you have to file a regular 1040 as a US resident. Similar to the situation of a US citizen who has lived abroad for many years and then returns to the US. Up until the point they moved, they were a bona fide resident overseas.

There may be other complicating factors, but it's definitely worth a try.
Cheers,
Bev


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## Moulard

Sorry, a poor choice of words on my part.

I was not trying to suggest anyone try to game the system. In fact that would be extremely stupid thing to do, as it introduces a level of wilfulness which can open you up to a world of hurt.

I was the one who raised the option of Bona Fide residence and the idea that because the OP is on a non-immigrant visa, they could very well still be a Bona Fide resident of Russia even though they are Domiciled in the US. Intent starts to play a part here. Which is why I asked questions like contract terms, visa length, the maintenance of a home in Russia etc, which could all be used as indicators that the domicile in the US is perceived to be a temporary one by the OP.

I raised it because I believe it is a perfectly valid and legitimate possibility for the OP.


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## kabasan

It is interesting how did the story finish in 2017? 
It is very hard to find how “foreign tax exclusion” is applicable for non-US nationals moving to US for the first time. I would be glad if you share your past experience here.


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## Bevdeforges

kabasan said:


> It is interesting how did the story finish in 2017?
> It is very hard to find how “foreign tax exclusion” is applicable for non-US nationals moving to US for the first time. I would be glad if you share your past experience here.


In the first year you are resident in the US, you are considered a "dual status alien"and there are particular tax rules which apply. Start here for more information: https://www.irs.gov/individuals/international-taxpayers/dual-status-aliens 
and be sure to follow the relevant links at the bottom of the page.


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