American Expats with Foreign Spouses: Choosing Your US Tax Filing StatusSubmitted by Creveling & Creveling Private Wealth Advisory on February 28th, 2013
This article is for general information purposes only and is not intended as specific tax advice. Please consult your tax advisor for advice relevant to your situation.
Americans who live overseas and who are married to foreigners can choose which filing status to use when filing their U.S. income taxes. Expats often don’t give much thought to this choice, which involves selecting either married filing jointly (MFJ), head of household (HOH), or married filing separately (MFS). Yet if you are in this situation, the U.S. tax filing status you choose may make a big difference on how much U.S. tax you pay, both in the current year and over the long run. Therefore, it’s important to carefully weigh your options. Below, we review the choices and their consequences to help you make the best selection for your situation.
The choice is available specifically to American expatriates who are married to non-resident aliens (NRAs). A non-resident alien is any individual who is not a U.S. citizen or green card holder and who does not reside inside the United States according to the Internal Revenue Service’s “substantial presence test.” If you’re an American expat married to a non-resident alien, you can include your spouse on your annual U.S. income tax filing (form 1040) by choosing the married filing jointly status. You can also choose to have your spouse remain outside of the U.S. tax system by using the married filing separately status (or head of household status if you have dependent children). To decide which makes sense for you, consider the following.
- Choosing Married Filing Jointly—NRA Spouse Treated as a U.S. Resident
If you choose the married filing jointly status when filing your U.S. taxes, both you and your spouse will be subject to U.S. income tax in the years that the choice is in effect. This may result in U.S. tax savings, especially if your spouse does not have much non-U.S. source income or assets of their own.
- Your income may fall in lower tax brackets, so that overall you pay less tax than if you used the married filing separately or head of household option.
- If you do not itemize deductions, you can increase your standard deduction. For filing year 2012, this means an additional $5,950 of income could be shielded from tax if you’re married filing jointly versus married filing separately. (Note that the personal exemption doesn’t change between MFJ and MFS; when you are MFS you can still claim a personal exemption for your non-resident alien spouse, as long as he or she has no income for U.S. tax purposes and is not a dependent of another U.S. taxpayer.) The increased standard deduction can be useful even if all of your foreign earned income is excluded using the foreign earned income exclusion and housing deduction, as you can still save tax on other types of income.
- If you have earned income that hasn’t been excluded using the foreign earned exclusion or housing deduction, your foreign spouse can make contributions to their own U.S. tax-advantaged accounts, such as an individual retirement account (IRA). For 2012, this means your spouse can contribute $5,000 if they are under age 50 and $6,000 if they are 50 or over.Depending on your overall income level, you may be able to deduct this amount from your taxable income, or your spouse may choose to make a Roth IRA (after-tax) contribution.
- In a future year, you can continue to use the married filing jointly status or file a separate return.
- If you choose the married filing jointly status, your spouse is now considered a U.S. resident alien subject to U.S. tax on their worldwide income. All of your spouse’s income is now reportable and taxable on your U.S. 1040. Therefore, this choice may not make sense if your spouse has income, either earned (salary) or investment income.
- Additionally, if your spouse owns foreign accounts or businesses, he or she may need to file a number of additional forms such as foreign bank account reporting (FBAR), Form 8938, 5471, etc.
- If your spouse owns foreign mutual funds, he or she may be subject to the complicated reporting rules and higher tax rates involving passive foreign investment companies (PFICs).
- You can only choose MFJ with an NRA spouse once in a lifetime. If you revoke the choice in a later year, you will not be able to use the MFJ status with a non-resident alien spouse again, even if you remarry a non-resident alien following a divorce or if your NRA spouse dies.
Choosing Married Filing Jointly: You can choose the MFJ status by attaching a written statement when you file your joint return. Your spouse will need to apply for a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). Note that while this choice can save some American expats U.S. tax, it should not be made lightly since the choice to use the married filing jointly status with a non-resident alien spouse can only be made once in a lifetime.
Ending the Married Filing Jointly Choice: Either you or your spouse can revoke the MFJ decision by attaching a signed statement to your return or mailing it to the Internal Revenue Service Center. The choice also ends if either of you die, if you legally separate, or if you divorce.
- Choosing Head of Household or Married Filing Separately—NRA Spouse Treated as a Non-U.S. Resident
You can choose to file your U.S. taxes as married filing separately or head of household if you have dependent children. In this case, your spouse’s non-U.S. source income is not taxable. Only your income is subject to U.S. income tax (albeit at potentially higher rates than if you were married filing jointly). However, by gifting amounts to your spouse, you may be able to shelter some of your future income on investments from U.S. tax.
- If your spouse has no U.S.-source income, he or she remains outside of the U.S. tax system. Your spouse’s non-U.S. income, investments, and foreign financial accounts not are reportable to the IRS.
- By making annual gifts to your NRA spouse, you can shelter a portion of your assets each year from U.S. income and estate tax and reporting. For example, in 2013 you can gift $143,000 to an NRA spouse without gift tax consequences—a much higher amount than the standard annual gift tax exclusion of $14,000. (Both gift exclusion limits adjust annually with inflation.)
- You can still claim a personal exemption for your NRA spouse, as long as he or she has no income for U.S. tax purposes and is not a dependent of another U.S. taxpayer.
- Your income may fall in higher tax brackets, so that overall you pay more tax than if you used the married filing jointly status.
- If you use the standard deduction, you’ll be limited to the standard deduction applicable to your filing status, which will be lower than if you were married filing jointly.
- You cannot make contributions to U.S. tax-advantaged accounts such as IRAs on your spouse’s behalf.
- Certain allowances and deductions may be lower than if you are married filing jointly. If you are married filing separately, other special rules may apply.
When choosing whether to have your non-resident alien spouse treated as a U.S. resident or non-resident for U.S. income tax purposes, American expats should carefully consider their situation along with their spouse’s situation. Having an NRA spouse can be a great U.S. tax shelter, but the spouse’s income, assets, and future plans to reside in the U.S. can all impact which filing status is optimal. You should also consider that your circumstances could change. For example, an NRA spouse who has no income or assets of their own now may in the future seek employment or inherit wealth. The choice to use the married filing jointly status with an NRA spouse can only be made once in a lifetime, so it makes sense to take the time to figure out which filing status is best for your situation.