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I am struggling with a tax situation and I have consulted professionals with conflicting opinions. (Does not help being abroad).

I became a greencard holder in 2022, i am filling taxes for 2022 (first ever filling, and yes I am late).

I will be claiming foreign earned income exclusion as I was in the U.S. for 5 days.

I earned a bonus for 2021 performance which was paid in april 2022. Can I as an individual use accrual accounting and thus avoid taxation on that bonus since I was not a U.S. tax person in 2021?

Any pointers are appreciated.

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  • Did you become a permanent resident before or after April 2022?
    – user102008
    Sep 1, 2023 at 16:51
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    There's very rarely, if ever, a good reason for an individual to deal with accrual accounting in their personal finances. As Stan H points out, it might not even change the outcome in your specific situation.
    – littleadv
    Sep 1, 2023 at 17:09

3 Answers 3

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Individuals can use accrual basis, but whichever method is chosen by filing your first tax return, subsequent accounting method changes must be approved by the IRS. See a similar question here and MTA's answer to your question.

In your case, the question that must be answered is whether your annual bonus would be considered 2021 income under the accrual method. My guess would be no, and here's why:

Let's say you were paid your bonus on April 1, 2022, and it was calculated based on your 2021 performance.

  • If you had left your company between January 1 and March 31, would you have gotten your bonus? In other words, is your bonus payment locked in by December 31, 2021? If not, it likely wasn't earned in 2021.

  • Does your company retain discretion over how the bonus amount is calculated in 2022? Can they change the formula? For example, can they decide to not pay expected bonuses to employees even if they met the original/expected bonus criteria? If so, it likely wasn't earned in 2021.

  • Is your bonus paid within 2 and ½ months after the end of the tax year (i.e. by March 15th for a calendar year taxpayer)? If not, it's recorded in the year it was received..

If you want to definitively figure out whether you can and should be an accrual taxpayer, you should consult a tax advisor (CPA, Enrolled Agent, etc.), as the totality of your situation will determine the optimal decision for you.

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This doesn't address your direct question, but assuming that you were not in the US much before you became a permanent resident, and you only became a US permanent resident (i.e. you only entered the US on your immigrant visa) in the last few days of 2022, then the income you earned in early 2022 shouldn't be taxable in the US anyway.

This is because, if you were a nonresident alien in 2021 (due to not passing the Green Card Test or the Substantial Presence Test), and a resident alien in 2022 (due to passing the Green Card Test), the First Year of Residency rules apply. In the case where you only pass the Green Card Test in 2022 and not the Substantial Presence Test, your residency starting date would be the date you became a permanent resident. You would be taxed as a resident alien for the part of the year after that date, and taxed as a nonresident alien for the part of the year before that date. So you would be a nonresident alien in April 2022 when you received the income, and thus it would not be subject to US taxes if if was not US-sourced income. You wouldn't need to use the Foreign Earned Income Exclusion in this case, since it is not taxable in the first place. Note that you would be a dual-status alien, and thus cannot use the standard deduction and cannot file jointly.

There are some cases in which you might choose to be treated as a resident alien for the whole year. If you are married, you can choose to use either the Choosing Resident Alien Status (if both you and your spouse were resident aliens at the end of the year) or the Nonresident Spouse Treated as Resident (if only one of you was a resident alien at the end of the year) elections, both of which will treat both of you as resident aliens for the whole year and force you to file jointly. In this case, income you received in early 2022 would need to be reported on your US taxes since you were treated as a resident alien, but you would be able to use the Foreign Earned Income Exclusion and/or Foreign Tax Credit to reduce some or all of your US taxes on that income.

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According to IRS Pub 538, Accounting Periods and Methods, most individuals use cash accounting, some use accrual, and it is not permitted to switch back and forth without IRS permission. You might consider using accrual accounting for your first tax return, then immediately applying for permission to use cash accounting on all future returns. If permission is not granted, you would be required to remain an accrual accounting taxpayer thereafter.

Change in Accounting Method

Generally, you can choose any permitted accounting method when you file your first tax return. You do not need to obtain IRS approval to choose the initial accounting method. You must, however, use the method consistently from year to year and it must clearly reflect your income. See Accounting Methods, earlier.

Once you have set up your accounting method and filed your first return, generally, you must receive approval from the IRS before you change the method. A change in your accounting method includes a change not only in your overall system of accounting but also in the treatment of any material item. A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Although an accounting method can exist without treating an item consistently, an accounting method is not established for that item, in most cases, unless the item is treated consistently.

Approval required The following are examples of changes in accounting method that require IRS approval. • A change from the cash method to an accrual method or vice versa. • A change in the . . . .

The above publication includes a recommendation to see Form 3115 for further information about getting permission for a change in accounting method.

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