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Tax implications of foreign spouse of a US Citizen

Tax Implications of Foreign Spouse of a US Citizen

If you are married to a non-American and you both live overseas, you may have wondered how this impacts on your U.S. tax filing situation, if at all. As with most concerns involving taxes, the more complicated they can make it, the better Congress likes it! This article will try to present your various tax obligations (and options) with regard to a non-American spouse as simply and precisely as possible.

The decision on how to treat your foreign spouse for income tax purposes is a critical part of Tax Planning. These are important points to consider:

  • If you intend to have your foreign spouse apply for a green card and eventually for the U.S. citizenship, it is in your best interest to treat him as a U.S.resident and file jointly.
  • If your spouse has a self-employment income you may choose to treat him as a nonresident and file separately. Then, his income is not a subject to U.S. income tax and self-employment tax.
  • If your non-resident spouse has foreign income from assets (e.g., rental income, capital gains, etc.) and you file as married filing separately or as head of household, this income is not a subject to U.S. income tax. If you file jointly, you must report this income on U.S. tax return.

Possibility #1 -- Spouse has "green card" or is otherwise considered "resident alien"

  • If your spouse has obtained a green card, is a naturalized U.S. citizen or is otherwise considered a resident alien, the situation is relatively simple. Even if you both live overseas, as long as your spouse has the status of a resident alien, he/she will be taxed as if he/she was a U.S. citizen. This means world-wide income is taxed for both of you. Not only is the earned income of each spouse subject to U.S. taxation, but any investment income, even if earned in a foreign country with the foreign spouse as the sole recipient, is subject to U.S. tax. The good news is that you can use the filing status of "married, joint" so that you get a higher standard deduction and a personal exemption for each of you. Also, if you each qualify for the foreign earned income exclusion, you can exclude up to $91,500 (for 2010) per person per year of foreign income.
    • Note: If your spouse is a citizen of another country (while also a resident alien in the U.S.), and you happen to live in that country, special rules may apply. In the event the U.S. has a tax treaty with that country, you should take a look at the treaty and/or consult a tax professional in that country.

Possibility #2 -- Spouse is considered "nonresident alien (NRA)" for U.S. tax purposes.

  • If your spouse has neither a green card nor resident alien status, he/she will be classified as a nonresident alien (NRA). If this is the case, you have 2 choices, each of which comes with its own set of complexities:

    A) Choose to treat spouse as resident alien for tax purposes.
    • If you follow this route, you must understand that you will have to report your spouse's worldwide income (as described above) and it will be subject to U.S. tax. You also should realize this is an active choice you make and there are certain procedures that must be followed to make it effective:
      • First, you have to attach a statement, signed by both spouses, to your tax return for the first year to which the choice applies. The statement must include a declaration that one spouse is a nonresident alien and the other is a U.S. citizen or resident alien, and you are choosing to both be treated as U.S. residents for the tax year. You also have to include the name, address and Social Security number (or Individual Taxpayer Identification number) of each spouse.
      • Second, note that for the first year you make the choice, you have to file a joint return. But in later years you can file joint or separate returns. It is also important to realize you must continue to file this way (treating both as U.S. citizens or resident aliens) unless you (or circumstances) end the choice. This can happen if either spouse revokes the choice in writing, either spouse dies, you have a legal separation or divorce, or the IRS ends the choice because it feels you haven't kept adequate records.

      Anna Scott has been a US citizen for many years. She is married to Nikos, a nonresident alien. Anna and Nikos make the choice to treat Nikos as a resident alien by attaching a statement to their joint return. Anna and Nikos must report their worldwide income for the year they make the choice and for all later years unless the choice is ended or suspended. Although Anna and Nikos must file a joint return for the year they make the choice, they can file either joint or separate returns for later years.

    • You might wonder why you would go to all this trouble, especially if you have to declare the foreign spouse's income. The main reason is you will use the "married, joint" filing status which gives you a higher standard deduction and many other benefits that are not available if you use the "married, separate" filing status. Also, if your spouse does not work or his/her income is excluded as foreign income, you have no additional income on which you owe tax while still getting the benefits of the "married, joint" filing status.

      Social Security Number
      If your spouse is a nonresident alien and you file a joint or separate return, your spouse must have either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). We can help our clients obtain ITIN number for their nonresident spouses while they are living abroad. You would have to provide original or certified copies of documents to verify your spouse's age, identity, and citizenship.

    B) Choose to treat spouse as nonresident alien for tax purposes.
    • If you decide you don't want to include your NRA spouse's income on your U.S. tax return, you generally will have to use the filing status of "married, separate". However, if your spouse has no income from sources within the U.S. and is not claimed as a dependent of another U.S. taxpayer, you can claim an exemption for your NRA spouse. You need to be sure to obtain a Individual Taxpayer Identification number for your spouse before filing the return (We can help you obtain ITIN with the IRS).
    • Furthermore, if you have other qualifying relatives living with you and you meet the other eligibility tests, you can file as "head of household". The tax rates and standard deduction for this filing status are much superior to that of the "married, separate" filing status.
    • Unlike the "choice" you made with regard to treating your spouse as a resident alien, there is no additional paperwork involved with treating your spouse as a nonresident alien for tax purposes. And if you find that the "married, separate" status has too many negative tax implications, you may decide that in future years you want to file "married, joint" by simply making the choice and attaching the statement described above.