American Expats with Foreign Spouses: Choosing Your US Tax Filing Status

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expat tax planning

By Peggy Creveling, CFA and Chad Creveling, CFA

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 may not give much thought to this choice, which involves selecting either married filing jointly (MFJ), head of household (HOH), or married filing separately (MFS). Yet for those in this situation, the U.S. tax filing status chosen may make a big difference in how much U.S. tax you pay, both in the current year and over the long run. 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.

Advantages

Your income may fall in lower tax brackets, so you pay less tax overall than if you used the married filing separately or head of household option.

If you don't itemize deductions, your standard deduction will be higher. For filing year 2023, this means an additional $13,850 of income could be shielded from tax if you're married filing jointly versus married filing separately. For tax year 2024, this figure grows to $14,600. The increased deduction can be useful even if all 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 2024, this means your spouse can contribute $7,000 if they are under age 50 and $8,000 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 or after-tax contribution.

In a future year, you can continue to use the married filing jointly status or file a separate return.

Disadvantages

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 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 from salary (earned) or investments.

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.

Making the choice to file 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.

Advantages

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 2023 you could gift up to $175,000 to an NRA spouse without gift tax consequences, rising to $185,000 in 2024. This is a much higher amount than the standard annual gift tax exclusions of $17,000 (2023) and $18,000 (2024).

Disadvantages

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.

In Summary

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.

This article is a revised and updated version of an article that originally appeared on www.crevelingandcreveling.com.

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About Creveling & Creveling Private Wealth Advisory

Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.

Copyright © 2024 Creveling & Creveling Private Wealth Advisory, All rights reserved. The articles and writings are not recommendations or solicitations, and guest articles express the opinion of the author; which may or may not reflect the views of Creveling & Creveling.