WSJ Ask an Expert: Tax Tips for U.S. Expats with Non-Resident Alien SpousesSubmitted by Creveling & Creveling Private Wealth Advisory on April 29th, 2015
The Wall Street Journal invited Creveling & Creveling to be part of a panel of experts for personal finance on its WSJ Expat site. The following article originally appeared on the WSJ site and has been shared with permission.
We often get asked how U.S. expatriates with nonresident alien (NRA) spouses should file their U.S. tax returns. Generally the default is to file married filing separately (MFS), or head of household (HoH) if you have qualified dependents. However, you do have an option to make a special election to file married filing jointly (MFJ), which effectively means your NRA spouse will be treated as if they were a resident alien (RA) for U.S. income tax purposes.
It's important to choose your U.S. tax filing status carefully. The choice can make a big difference on how much U.S. tax you pay, not only in the current year but also over the long-run. Be aware that many professional tax filing firms may make filing suggestions based on the current tax year and not take into consideration the longer-term implications. Since IRS rules limit switching between filing choices, it's important to choose which is best for your specific situation from the beginning. Here are points to consider:
- Consider married filing jointly (MFJ) if your NRA spouse does not have, and is unlikely to ever have, significant non-U.S. income or assets. With this option you could save on U.S. tax as you can take a larger standard deduction and your joint income will fall in lower tax brackets than if you file married filing separately. Additionally, you may be able to contribute to U.S. tax-advantaged accounts such as IRAs on behalf of your spouse, depending on your situation. However, be aware that your spouse will have to report worldwide income and foreign financial assets on your U.S. 1040 and FinCEN 114 report (FBAR). Note also that you can only choose MFJ with an NRA spouse once. If you revoke the choice in a later year, you will not be able to choose MFJ again.
- Consider married filing separately (MFS) (or head of household (HoH) if you have qualified dependents) if your spouse has significant non-U.S. income and assets or is likely to in the future. With these choices you could save on U.S. tax as your NRA spouse remains outside the U.S. tax system. 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. Additionally, with this option if you make gifts to your spouse (up to $147,000 in 2015 without gift tax filing consequences), your spouse can shelter some of your household's future investment earnings from U.S. tax. Remember though, once gifted, you will no longer own or control those assets, your spouse will.
Your choice of U.S. tax filing status can have a large impact on how much tax you pay over the long-run. An NRA spouse can be a great U.S. tax shelter, but make sure you understand how your spouse's income, assets, and future plans to reside in the U.S. may affect your situation.