US/UK Tax issues: Dual Status? / Investment Income/Dividends Treatment?

I need your help or views with my US taxes:

Background:
After 3 years in the US, at the end of April 2005 my wife and I moved back to London. I got US income associated with wages until April (i.e. $50,000); and US capital gains (2,500)+ US dividends (5,000) after April (investments I left in the US) - not resident period . My wife did not have income. We are not Americans or green cardholders. My foreign income in the year was less than the foreign income tax exclusion (80,000). UK tax treaty. Passed Physical presence test.

Questions:
-   Should we file a dual-status return (1040 and 1040NR, I understand that we cannot file a joint return) or just a resident tax income return (1040) with Foreign Income Exclusion? What would be the most tax efficient option given the Dividends in the second part of the year?
-   If filing as resident, and given FI exclusion <80000, do I need to file the Form 1116(FTC)?
-   In 2006, I would keep my investment: Should I notify that I am not resident to the US brokerage firms (30% tax withholding)? Would I have to pay for dividends or capital gains in 2006?

Thanks,

P.P.

1.  I would expect that it won't make much difference.  Either is acceptable and my guess is in the long run, your US tax liability will be the same. 

2.  You will only file the 1116 if you are not completely covered by the FI exclusion (assuming you meet the requirements of the 1116 that is).

3.  You will have to pay tax on the US investment as long as you hold it.  You should notify them of your status and you will need to file 1040NR in the future for these monies.

Thanks,
Is it the tax treaty defined by your country of residence or domicile?
How does the US/UK treaty work in practice if I am a "not ordinarily" resident in the UK and I have material dividends, capital gains/losses in the US from investments - not from business activities? (i.e. I pay 0% in the US, and if I do not remit funds to UK, I do not pay in the UK either – is it that realistic?)
Thanks,
p.p.

1. Firstly you need to determine your last day of residence.  If you did not make a section 6013(g) election plus a section 7701(b)(4) election in your FIRST year in the US it will probably be the last day of presence in the US in the tax year.  This will be the end of April 2005.  You then MUST both file dual status tax returns as MFS for 2005.  There is no choice.  You do not qualify to file under any other method.

2. Because you are R/NOR in the UK and the US income is not remitted to the UK then the dividend income during the NR period is taxed at 30%. Capital gains are not taxable at all in the NR period. 

With hindsight, better advice would have been to have taken professional advice BEFORE coming to the UK.

Thanks, Guya,
Let me clarify:

1) I intend to file a joint US resident tax return in 2005. I think that I have the choice of dual or R status since it is my year of departure. It also seems more tax efficient since a) the foreign income exclusion would offset my wages income in UK 2005 b) I would apply joint-returns tax rates. I might be wrong.

2) My question refers more to 2006 when I would be NR in US and NOR in UK, but I would have dividends, capital gains and interest in the US. You are saying that unless I remit the proceeds to the UK, the tax treaty would not apply and I would have to pay a flat 30% in the US. Is this correct?

Thanks,
p.p.

I do not know on what grounds you believe you are US resident thru' Decdember 31, 2005 (unless you were present in the US on that date).  If there are no such grounds you will become a tax evader if you file anything other than dual status returns.

The answer on dividends is as I previously described.

I was resident in the US for several years. I am not tax expert but I believe that under US Tax rules, in the year of the departure you can file as dual-resident (2 tax returns, one as R until departure date and one as NR thereafter) or a full year resident tax return (1 R tax return,reporting worldwide income, but with foreign income tax exclusion if you meet the Bona fide or physical presence test).

p.p.

I was resident in the US for several years. I am not tax expert but I believe that under US Tax rules, in the year of the departure you can file as dual-resident (2 tax returns, one as R until departure date and one as NR thereafter) or a full year resident tax return (1 R tax return,reporting worldwide income, but with foreign income tax exclusion if you meet the Bona fide or physical presence test).

p.p.

Before you spend lots of money on getting professional help I'd invest in a copy of TurboTax Premier as I think it
will answer most of your questions. If you've read my overly long recent threads you'll see that TurboTax handles
foreign tax issues quite well. Then you can try the self assessment on the hmrc website. If you don't feel comfortable
with the results then you could go to a professional , but doing the return on Turbo Tax does make you familiar with
all the forms.

Also it sounds as if you are reading the US/UK tax treaty, there is a useful memorandum at

http://www.hmrc.gov.uk/international/usa-index.htm

It explains the each article is plain english

p.p. - the second option you refer is only available to US citizens or residents.  You have provided no legal basis by you consider yourself a US resident on December 31st.  Unless you have such a reason, you MUST file dual status tax returns.