Tax Returns with Foreign Spouse
If you are an American Citizen or Green Card Holder living abroad and you are married to an individual who neither has US Citizenship nor a US Green Card, you may or may not be aware of the fact that you are not required to claim your spouse’s income on your US expat tax return. If you didn’t already know it, that’s the bottom line. For many US Expats, however, there’s a lot more to it than that.
While it’s true you don’t have to claim your spouse’s income on your US expat tax return, the option exists for you to do just that. So why would you want to report your spouse’s income to the Internal Revenue Service? The truth is, there are a variety of good reasons. Granted, it’s not the right choice for everybody, but there are numerous situations in which claiming your spouse’s income can prove beneficial for a better return both now and in the future.
In this article, we will be taking a look at the different filing options you have and in which circumstances it would benefit you to exercise each option. Remember that this article is intended to empower you with options only – not to serve as detailed or thorough international tax advice. Make sure to get in touch with an experienced and well qualified US Expat Tax Advisor if you have questions about your individual situation.
Before we delve into the details of your 2 options, let’s briefly discuss the term ‘Non-Resident Alien’ or ‘NRA’. As determined by the IRS, a Non-Resident Alien is defined as a person who:
- Lives in a country outside the United States
- Does not have US Citizenship
- Does not have a US Green Card
- Does not have a residence in the United States as defined by the IRS Substantial Presence Test
So what are your filing options as an American Expat married to an NRA and which of them makes the most sense for you?
Option 1: Choosing to Not Include Your Spouse’s Income on Your US Expat Tax Return
At the beginning of the article we touched briefly on the fact that you’re not required to report your NRA spouse’s income on your US expat tax return. Now we will take a deeper look at how this option is exercised and who benefits from it.
For situations in which your NRA spouse has a very large income and/or high value investments which would significantly increase your tax liability, not being required to report his/her income is quite advantageous. Conversely, if you have excessive cash flow, large investments, or other physical or monetary assets and you wish to shelter some of these assets from US taxation and/or reporting, you may gift up to $143K to an NRA spouse in 2013 with no gift tax liability whatsoever.
When deciding whether or not to exercise this option, it’s important to consider all types of income, available exclusions and deductions, and any adverse implications. For example, if your spouse is not recognized by the IRS as a US Taxpayer you will be unable to make contributions to a tax-deferred US-based account such as an IRA on his/her behalf. You must also consider that you have higher deductions and exclusions available if you decide to file a joint return with your spouse. For example, a US Expat filing a Single, Head of Household, or Married Filing Separately tax return can exclude up to $92,900 of his/her foreign income from US taxation by claiming theForeign Earned Income Exclusion on Form 2555. A US Expat filing a Married Filing Jointly return can claim up to $185,800; so make sure to take this into consideration when evaluating your combined income levels.
If it makes sense for you to not include your NRA spouse’s income, there is an additional benefit of the IRS not having any records on his/her foreign income or assets: You can claim a personal exemption for your NRA spouse provided he/she has no income from the US and cannot be claimed as a dependent on another taxpayer’s US tax return.
How to File Your US Expat Tax Return
To exclude your NRA spouse’s income from your US expat tax return, you have 2 options as far as filing status: Head of Household (HOH) or Married Filing Separately (MFS). If you have dependent children, you may file HOH; if not, you will need to file as MFS. When you check the MFS box on Form 1040, you will also be asked to provide your spouse’s name and Social Security Number. Since your NRA spouse doesn’t have a US Social Security Number, simply write NRA in its place.
Option 2: Choosing to Include Your Spouse’s Income on Your US Expat Tax Return
Now it’s time to take a look at what it means to include your NRA spouse’s income on your US expat tax return. Many US Citizens living abroad with a foreign spouse will find this option advantageous, but it’s important to exercise this option with both eyes open. Choosing to have your NRA spouse recognized as a US Taxpayer by the IRSfor the purpose of filing a joint return is not an option you can reverse and reapply when it suits you; it’s an option you can exercise only once in a lifetime. If you divorce and wind up marrying another Non-US Citizen, this option will not be available to you.
There are more implications to this decision than the tax benefits, as well. Among them is that of the future status of your NRA spouse and his/her income and assets. He/She will be required to file taxes and report qualifying foreign accounts in future years whether you file a joint return or you file separately. If you anticipate big changes in the future that include your foreign spouse having more income, working with profitable investments, or receiving a large inheritance of cash or valuable assets you may want to hold off on this decision.
If your foreign spouse has little or no income, you could file a joint return to take advantage of the additional deductions and exclusions which would apply to your combined income. This would essentially double your deductions and significantly reduce your tax liability. If you’re in a particularly high tax bracket and your spouse’s income is very low or nil, this option is extra beneficial; you may be able to exclude enough income and take enough deductions to reduce your tax bracket to a lower level percentage of taxation.
Not only would your standard deduction and other exclusions be higher, you would also be able to deduct up to $5K-$6K (below/above the age of 50) of any tax-deferred contributions made by your NRA spouse to a qualifying retirement or pension plan to further reduce your tax liability.
When considering this option, take into account all sources of income of your NRA spouse. If he/she has no income or assets, it should be an easy decision. If there are mutual funds or other investment accounts, properties, financial accounts worth over $10K, interest bearing accounts, or any other possible sources of income, you may want to not only consider the amount of income earned but also the complexity of filing returns involving passive foreign investment companies. In the end, it may make more sense to keep your NRA spouse off the radar and take advantage of his/her financial assets and shelter as much of your income as possible through the high foreign spousal gift tax exclusion.
How to File Your US Expat Tax Return
If you’ve decided it makes sense for you and your NRA spouse to file a joint return for an indefinite period of time, you will have to prepare for your return in advance by having your NRA spouse apply for a US Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). When you file your US expat tax return, you will check the box, Married Filing Jointly (MFJ) on Form 1040 and fill in the top portion with both your information.
If you decide you want to revoke your decision to have your NRA spouse recognized as a US Taxpayer by the IRS, you or your spouse will have to write a statement announcing this decision and attach it to your final MFJ return. In the event of death, legal separation, or divorce your decision will be revoked by default.
Making the Decision
Depending on the specifics of your marriage, current financial situation, and your future plans, making the decision on which of these routes to take could be a no-brainer. On the other hand, there could be a long list of circumstances which require careful consideration. If you’re unsure of the most advantageous option for the circumstances that are unique to you, you can always build a great tax plan with one of our international tax experts at Taxes for Expats.
I.J. Zemelman, EA is the founder of Taxes for Expats