Moving to or from the United States mid-year creates a unique tax situation called dual tax residency, where you're treated as both a resident and non-resident in the same tax year. This split status completely changes your tax obligations - you'll pay taxes on worldwide income during your resident period, but only on US-sourced income during your non-resident period.
The IRS determines your status using the Substantial Presence Test, which requires at least 31 days in the US during the current year and 183 days calculated over three years using a weighted formula. If you qualify as a tax resident in both India and the US simultaneously, you could face double taxation on the same income, though the India-US Double Taxation Avoidance Agreement (DTAA) provides relief through foreign tax credits and tie-breaker rules.
Understanding dual tax residency is critical because even a single day can shift your tax obligations and potentially cost you thousands of dollars in unnecessary taxes.
Key Takeaway
Dual tax residency affects your tax obligations in both the US and India, determining which income gets taxed and where.
Here's what you'll learn:
- How to determine your dual-status: Understand the Substantial Presence Test and when you transition between resident and non-resident status
- Filing requirements and forms: Know which forms to file (1040 vs 1040NR), deadlines, and why you cannot claim standard deductions as a dual-status taxpayer
- Avoiding double taxation: Use the India-US DTAA, Form 1116, and Form 67 to claim foreign tax credits and apply tie-breaker rules
- State tax complications: Navigate how California, New York, and other states have separate residency rules that can conflict with federal status
What is Dual Tax Residency for US based NRIs?
Tax rules from the IRS need careful attention to understand dual tax residency if you have split time between the United States and India as a Non-Resident Indian (NRI).
Definition of dual-status taxpayer
A dual-status taxpayer qualifies as both a resident and non-resident of the United States in the same tax year. Your citizenship doesn't affect this status - it only relates to your residency status for U.S. tax purposes. The IRS created this classification if you have changed your tax status during a single calendar year, either from non-resident to resident or the other way around.
Common scenarios: moving in or out mid-year
Two main situations create dual tax residency. The first happens when you arrive in the United States mid-year and establish residency. The second occurs when you leave the U.S. and switch from resident to non-resident status. Let's say you're an NRI who gets a Green Card in July - you would be a dual-status taxpayer that year. The same applies if you leave the U.S. in March after being a resident.
Your move date plays a significant role because it determines whether your income faces U.S. worldwide taxation. Each day of residency status adds to your tax obligations. Marina's case shows this clearly - each resident day added about $328 to her U.S. taxable income.
Difference between resident and non-resident periods
The difference between these periods creates two distinct tax obligations:
Resident Period:
- U.S. taxes apply to your worldwide income
- Progressive U.S. tax rates (10% to 37%) affect all income
- You get fewer deductions compared to full-year residents
Non-Resident Period:
- U.S. taxes apply only to U.S.-sourced income
- Your foreign-sourced income stays completely free from U.S. tax
- Income falls into two groups: effectively connected income (taxed at progressive rates) and passive income (taxed at a flat 30% or treaty rate)
Tax rules change completely on the exact date your residency status changes. So, you must document your transition date properly to file taxes accurately and potentially save money.
How Dual Tax Residency is Determined by the IRS
The IRS uses strict criteria to determine who can qualify for dual tax residency status. You can become a tax resident by passing the Substantial Presence Test or having a green card.
Substantial Presence Test (SPT) explained
The IRS uses the Substantial Presence Test as a mathematical formula to identify tax residents. You must meet two key requirements to pass this test:
- Your physical presence in the United States should be at least 31 days during the current calendar year
- You need to spend a total of 183 days in the U.S. during a three-year period that covers the current year and two prior years
The second requirement works on a weighted formula. The IRS adds up:
- Every day you spent in the current year
- One-third of your days from last year
- One-sixth of your days from two years ago
The IRS will count you present in the United States if you're physically in the country at any time during that day.
SPT calculation example for clarity
Let's look at an example. You spent 120 days in the U.S. each year from 2021 to 2023. Here's how to figure out your 2023 residency status:
- 2023: 120 days × 100% = 120 days
- 2022: 120 days × 1/3 = 40 days
- 2021: 120 days × 1/6 = 20 days Total: 180 days
Your total falls below the 183-day threshold, so you wouldn't qualify as a resident for 2023.
Green card holders vs SPT-based residents
Green card holders automatically become U.S. tax residents whatever their physical presence in the country. They must pay taxes on worldwide income until they give up their green card, though tax treaties might change this requirement.
SPT-based residents need to keep track of their U.S. days each year to know their status.
Exceptions for F, J, M visa holders
Some visa holders get special treatment:
- Students with F-1, J-1, M, or Q visas don't count their days toward the substantial presence test for five calendar years
- Teachers and researchers on J-1 or Q visas get a two-year exemption
- These exempt years don't need to be back-to-back
Medical conditions that keep you from leaving the US. don't count toward your days. The same goes for days you spend traveling between two foreign locations.
Filing Taxes in the US and India as a Dual Resident
Filing tax returns as a dual resident demands expertise to handle different forms and deadlines between countries.
US Tax Forms: Form 1040, 1040NR, 1116
Your status on December 31 determines which form you need to file. Residents on the last day of the year must submit Form 1040 with Form 1040NR attached. Nonresidents on December 31 should file Form 1040NR with Form 1040 attached. The IRS taxes worldwide income during your resident period, while only US-sourced income applies during nonresident periods. You can avoid double taxation by claiming foreign tax credits through Form 1116.
Indian tax forms: ITR-2/3 and Form 67
NRIs must file ITR-2 when reporting income without business profits or ITR-3 with business income. Relief from US taxes requires Form 67 submission before your return's due date. This electronic form needs details about paid taxes, country information, and income sources.
Reporting foreign assets in Schedule FA
Indian residents must complete Schedule FA when they own assets outside India. The schedule tracks foreign bank accounts, investments, properties, and their peak/closing balances in INR. Schedule FA's reporting period follows the calendar year from January to December instead of the financial year.
Deadline: April 15 vs June 15
US residents must file returns by April 15 if they maintain resident status on December 31. Nonresidents without US wage income get an automatic extension until June 15. Indian tax authorities set the ITR deadline at July 31, and taxpayers can revise their returns until December 31.
Tax Planning and DTAA Benefits for Dual Residents
You need smart planning to handle your tax obligations when you're a resident of both countries.
India - US DTAA: credit method and exemptions
The India–US Double Taxation Avoidance Agreement (DTAA) helps prevent double taxation through the credit method. You can deduct taxes paid in one country from what you owe in the other. This agreement covers your income from different sources like salaries, business earnings, capital gains, interest, dividends, and royalties.
Using Form 1116 and Form 67 for foreign tax credit
You'll need to file Form 1116 with your U.S. tax return and Form 67 with your Indian return to claim foreign tax credits. This helps you avoid paying taxes twice on the same income by letting you offset taxes between countries.
Tie-breaker rule to resolve dual residency
The tie-breaker rule steps in when both countries say you're their tax resident. Your primary residence gets determined through a step-by-step analysis that looks at your permanent home, life's center of interests, where you usually live, and your nationality.
State tax residency rules and conflicts
States make their own residency decisions separate from federal rules. Most states will call you a "resident" if you're there for more than just a temporary stay. Your domicile - the place you consider your permanent home - plays a big part in how states decide your tax residency.
Importance of maintaining travel and income records
You need solid proof to back up your claims. Keep detailed travel logs, passport stamps, flight details, and electronic location data to show where you've been. Make sure you also save documents about your income sources, tax payments, and residency certificates.
Conclusion
US-based NRIs face both challenges and opportunities with dual tax residency. You need to know your status to comply with tax laws and avoid penalties. Your tax obligations change based on your residency periods - you'll pay taxes on worldwide income as a resident, but only on US-sourced income as a non-resident.
Meeting the Substantial Presence Test or having a green card determines your residency status. This status affects which tax forms you need to file in both countries. US tax filing might need Forms 1040, 1040NR, and 1116, while Indian returns require ITR-2/3 and Form 67 to claim foreign tax credits.
The India-US DTAA provides relief through credit method and tie-breaker rules when both countries claim you as their resident. This agreement protects your income from double taxation between countries. State tax residency rules might not match federal guidelines, so you'll need to review your specific situation carefully.
Good documentation will protect you during audits or questions from tax authorities. You should keep detailed travel logs, income records, and residency certificates to back up your tax positions. Smart tax planning based on your dual residency could save you substantial money each year.
Your success with dual resident NRI taxes depends on knowing your status, understanding the rules, and filing correctly in both countries. Tax professionals who focus on international taxation can help you handle this complex area and optimize your tax position while meeting all requirements.
Frequently Asked Questions
How do I determine if I'm a dual-status taxpayer?
You become a dual-status taxpayer when you transition between resident and non-resident status during the same tax year. The IRS uses the Substantial Presence Test (SPT) to determine this - you need at least 31 days in the US during the current year and a weighted total of 183 days over three years (current year counts 100%, previous year counts 1/3, and the year before that counts 1/6). If you get a Green Card mid-year or leave the US mid-year after being a resident, you'll have dual status for that year. The exact date your residency changes matters significantly because it determines which portion of your income faces worldwide taxation versus US-source-only taxation.
Can I claim the standard deduction as a dual-status taxpayer?
No, dual-status taxpayers cannot claim the standard deduction and must itemize their deductions instead. However, there's an important exception - if you're married to a US citizen or resident alien, you can make a Section 6013(g) or (h) election to be treated as a full-year resident and file jointly, which allows you to claim the standard deduction. This election means your worldwide income becomes taxable for the entire year, but the standard deduction and tax credits often offset this burden. You should calculate both scenarios with a tax professional to see which approach saves you more money.
What is the tie-breaker rule and how does it determine my primary tax residency?
When you qualify as a tax resident in both India and the US simultaneously, the India-US DTAA tie-breaker rules determine your primary residency through a step-by-step test. First, it looks at where you have a permanent home available, then examines your center of vital interests (closer personal and economic ties), followed by your habitual abode, and finally your nationality. Your center of vital interests considers factors like where your family lives, where your main economic activities are, and where you maintain stronger personal connections.
Once your primary residency is determined, that country gets the first right to tax your income, while the other country typically provides foreign tax credits to avoid double taxation.
How do I avoid paying taxes twice on the same income?
You avoid double taxation by claiming foreign tax credits using Form 1116 when filing your US tax return and Form 67 when filing in India. The India-US DTAA allows you to offset taxes paid in one country against what you owe in the other through the credit method. For example, if you paid $5,000 in Indian taxes on rental income, you can claim that as a credit against your US tax liability on the same income.
You'll need to maintain detailed documentation including tax payment receipts, income statements, and your Tax Residency Certificate (TRC) to support your foreign tax credit claims.
Do state tax residency rules differ from federal rules?
Yes, state tax residency rules can differ significantly from federal guidelines, and you could be a federal non-resident while being a state resident (or vice versa). States like California and New York have their own 183-day tests and domicile rules that operate independently of IRS rules.
For instance, New York applies a "convenience rule" where income earned by remote workers is still taxed by New York if their employer is based there, even if they physically work elsewhere. You need to track your state-level presence separately and understand that some states can claim you as a resident based on having a permanent home there, regardless of your federal status.
Which tax forms do I need to file as a dual-status taxpayer?
Your filing form depends on your residency status on December 31st of the tax year. If you're a resident on December 31, you file Form 1040 as your main return with "Dual-Status Return" written across the top, and attach Form 1040NR as a statement labeled "Dual-Status Statement" showing your non-resident period income. If you're a non-resident on December 31, you do the opposite - Form 1040NR is your main return and Form 1040 becomes the attached statement. Your filing deadline is April 15 if you're a resident on December 31 or if you received wages subject to withholding, but extends to June 15 if you're a non-resident without US wage income.
What documentation should I maintain to prove my residency status?
You should maintain comprehensive travel records including passport stamps, boarding passes, flight itineraries, and electronic location data (credit card statements, phone records) to prove where you spent each day.
Create a day-counting calendar that tracks your physical presence in the US, India, and other countries throughout the year, as this becomes critical evidence during audits. Keep all income documentation (W-2s, 1099s, foreign income statements), tax payment receipts from both countries, and your Tax Residency Certificate for at least seven years. States like California and New York are particularly aggressive with residency audits and can look back several years, so detailed contemporaneous records (created at the time, not reconstructed later) are your best protection against challenges from tax authorities.
About the Author
By Prakash
CEO & Founder of InvestMates
Prakash is the CEO & Founder of InvestMates, a digital wealth management platform built for the global Indian community. With leadership experience at Microsoft, HCL, and Accenture across multiple countries, he witnessed firsthand challenges of managing cross-border wealth. Drawing from his expertise in engineering, product management, and business leadership, Prakash founded InvestMates to democratize financial planning and make professional wealth management accessible, affordable, and transparent for every global Indian.
