IRS is Wrong on Standard Deduction
Posted on March 4th, 2010 by bunilaw
Dual status aliens in New York or Vermont get the standard deduction despite what IRS says.
If you are a non-resident alien for part of the tax year and a resident alien for the other part, the IRS tells you you can’t take the standard deduction (see, e.g., Pub 519, p33 rev. Apr14/09). Don’t listen to this advice if you live in New York or Vermont. It’s wrong and hasn’t been the law in the 2nd circuit for over 30 years. (The 2nd circuit encompasses the states of New York and Vermont).
In 1964 the Service published its position that dual status taxpayers cannot take the standard deduction (Rev Rul 64-60). It articulated almost no reasons for its position. In 1977 a Philippino couple won a challenge to the Service’s position in the 2nd Circuit, Nico v. Comm’r, 565 F.2d 1234 (1977). They argued successfully that the language of Treasury’s own regulation (1.871-13(a)(1)) suggests they should be entitled to the standard deduction for their resident portion of the year and that if there was any question about what the regulation meant it had to be construed in their favor. The 2nd circuit agreed, found Rev. Rul. 64-60 wrong, and reversed the Tax Court for following it.
Here are some examples of dual status. You start out the year with an F-1 visa and change to H-1B. You may be non-resident for the F-1 portion and resident for the H-1B portion. You enter the US during the year on H-1B visa, or you begin the year on H-1B visa and repatriate during the year. You may be a resident during the period of your H visa and a non-resident when you are in your home country. You could also have dual status in the year when you get or give up a green card. Other situations can give you dual status. If unsure, you should consult with a tax attorney.
If you have dual status and live outside of New York or Vermont and take the standard deduction keep in mind that the Service may fight in court to disallow.
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