First Year Choice vs. 1040 NR

[pwehm1952]

Have a client who came to US from India 9/23/06. He will be in US all of 2007 working. How do I file his 2006 return? Does he qualify for first year choice since he will meet the substantial presence test in 2007? If so, what is the date he will meet the test?

[jerome]

It depends on whether the taxpayer was a lawful permanent resident of the US during 2006 or not. If not, file Form 1040 NR.

The Tax Book, page 14-11 presents the following on whether the taxpayer is a lawful permanent resident or meets the substantial presence test. In your case, I would say your client does not meet the substantial presence test during 2006:

“Taxation of Worldwide Income

As a U.S. citizen or resident alien, one’s worldwide income gener¬ally is subject to U.S. income tax, regardless of where he or she is living. Also, the taxpayer is subject to the same filing require¬ments that apply to U.S. citizens or residents living in the United States.

Resident aliens. A resident alien is an individual that is not a cit¬izen of the United States and who meets either the “green card” test or the substantial presence test for the calendar year.

• Green card test. A taxpayer is a U.S. resident if he or she was a lawful permanent resident of the United States at any time. This is known as the “green card” test because immigrant visas held by resident aliens are also known as green cards.

• Substantial presence test. A taxpayer is considered a U.S. res¬ident if the substantial presence test is met during the calendar year. A taxpayer is considered to be substantially present in the U.S. if he or she is living in the U.S. for a minimum of 31 days during the current calendar year, and a total of 183 days during the current calendar year and two preceding years. Note: For purposes of counting 183 days, count all the days of physical presence in the current year, but only one-third the number of days of presence in the preceding year, and only one-sixth the number of days in the second preceding year.”

[Koss]

Not enough info...

The response you received above from Jerome is based on incomplete and inaccurate information.

Your client may indeed meet the substantial presence test for 2007, and if he does, he can make the first year election for 2006. But be careful. He can't file the 2006 tax return until he has met the substantial presence test for 2007. So he probably needs an extension. Count the days of presence during 2006, and subtract that from 183. That will tell you how many days he needs to be in the US during 2007 before he can file the return.

With that being said, it makes a BIG difference what kind of visa he has, whether he is married, whether there are children, and whether he has an SSN or an ITIN.

I'm gonna take a wild guess here, based on a bit of experience I had last year...

Your client is probably here on a business visa, and the company he works for may have classified him as a trainee or an apprentice. They are probably training him on how to perform a call center job, such as inbound telemarketing to take catalog orders by phone, or tech support for some sort of software. They are training him so he can go back to India and train a bunch of other people, so the company can outsource the whole call center.

(In fact, the people training him here in the US may lose their jobs when the call center in India goes live.)

Okay, now that I have revealed a political agenda within this post, I'll go back to talking about your client's tax return.

There are special rules for trainees and apprentices from India.

There is a tax treaty between the US and India.

A nonresident alien from India who is a trainee or apprentice can usually file Form 1040NR, and still file a JOINT RETURN. And they can take the STANDARD DEDUCTION. And they can claim DEPENDENT EXEMPTIONS. All this in spite of the fact that the taxpayer is nonresident alien. All kinds of stuff that's normally not allowed on a Form 1040NR may be available if you are an apprentice from India.

The first-year election may not be necessary, and it may not be in your client's best interest. He may be able to do a Form 1040NR and get the same result.

I could be way off here. Maybe your client is a graduate student, pursuing a PhD in chemical engineering at state university.

That may still be considered a trainee or an apprentice.

To give your client the best advice, you'll need to do some reading in Pub. 901, Pub. 519, and the instructions for Form 1040NR.

Burton M. Koss

[GIMoe]

Just Curious

Your client may indeed meet the substantial presence test for 2007, and if he does, he can make the first year election for 2006. But be careful. He can't file the 2006 tax return until he has met the substantial presence test for 2007. So he probably needs an extension. Count the days of presence during 2006, and subtract that from 183. That will tell you how many days he needs to be in the US during 2007 before he can file the return.

Since he is trying to meet the substantial presence test for 2007 isn't each day of presence for 2006 counted as only a 1/3 day. Which means you need to count the days of presence during 2006, divide by 3 then subtract that answer from 183. That will tell you how many days he needs to be in the US during 2007 before he can file the return.

[pwehm1952]

More Infor

Taxpayer says his visa is L1-B. His wife did not join him in the US until 2007 so he will be filing single for 2006. I'm thinking the 1040NR will be the best way for him to go.

[Koss]

Since he is trying to meet the substantial presence test for 2007 isn't each day of presence for 2006 counted as only a 1/3 day. Which means you need to count the days of presence during 2006, divide by 3 then subtract that answer from 183. That will tell you how many days he needs to be in the US during 2007 before he can file the return.

Yes, you're right. For the substantial presence test for 2007, you would count only 1/3 of the days of presence in 2006.

Burton