Are you married to a foreign spouse? A non-resident of the USA?
A foreign spouse or as the IRS puts it, a nonresident alien, what is that, you may wonder? In this day and age, with businesses going global and worldwide travel being so easy, it is more and more common to see marriages take place between a U.S. citizen/non-U.S. citizen who is a resident of another country. These marriages trigger significant tax consequences.
Foreign Spouse, U.S. Resident Aliens
Individuals who have become permanent U.S. residents but are not U.S. citizens are classified as U.S. Resident Aliens. To be classified as a U.S. resident alien, the individual must be a “green card” holder or meet a “substantial presence test” that is based on time spent in the U.S in the current and prior two years. For U.S. income tax purposes, a resident alien is treated the same as a U.S. citizen and is taxed on worldwide income.
However, being married to a nonresident spouse complicates the selection of a filing status for U.S. tax return purposes and requires the couple to make one of two possible elections:
Married Filing Jointly
For a citizen/resident to file a joint return with a nonresident spouse, the taxpayers must include and pay U.S. taxes on the worldwide income of both spouses on their joint U.S. tax return, or
Married Filing Separately
If they choose not to file jointly, then the citizen/resident spouse files a married separate return without the income of the nonresident spouse and pays U.S. taxes on only his or her worldwide income. If the foreign spouse has U.S. source income, the nonresident spouse may also have to file a U.S. income tax return using the married filing separate status on that return.
Filing Status Implications if You Are Married to a Nonresident Spouse
The choice of filing status has significant tax implications. If filing jointly, the taxpayers enjoy the lower tax rates of the married filing jointly filing status, have a higher standard deduction ($12,600 for 2015, as opposed to $6,300 for married individuals filing separately), and are able to claim the $4,000 personal exemption for both spouses. On the other hand, if the spouse who resides in another country has significant income, especially non-U.S. source income, it may be a better choice for the U.S. citizen/resident to file married filing separately without the income of the spouse who residence is in another county.
Higher income taxpayers, who are married to a foreign spouse, and with investment income are subject to a 3.8% surtax on net investment income. This surtax has an income threshold of $250,000 for married taxpayers filing jointly and $125,000 for those filing as married filing separately. However, individuals filing as non-resident aliens are not subject to this surtax. Therefore, when weighing the pros and cons of making the election to treat a foreign spouse as a U.S. resident, the effect of the 3.8% tax on the couple’s total tax picture must be analyzed. Who knew it would be so complicated to be married to a foreign spouse?
Other Issues When Married to someone who lives in another country?
Another issue to consider is that when one spouse is a not a US resident, the earned income tax credit can only be claimed on a joint return.
To make the election to file jointly, both parties must make the election by attaching the required statement, signed by both spouses, to the joint return for the first tax year for which the choice applies. Generally this will require obtaining an individual taxpayer identification number (ITIN) for the spouse who lives in another country because the nonresident spouse generally will not qualify for a Social Security number.
Determining your best course of action for tax purposes when married to a non-resident alien can be complicated. If you need assistance in making the decision of whether or not to treat your foreign spouse as a resident and/or obtaining an ITIN for your spouse, please call Alex Franch, BS EA a call at 781-849-7200. To read more from the IRS on this subject matter, click here.
Sources and Resource for Married Couples
- Early Year-End Tax Planning To Take Advantage Of Possible Tax Reform
- Surviving Spouse Estate Tax Exclusion
- Getting Married? See What Can Be Tax Deductible
- Vacation, Who Cares for the Kids?
- Same-Sex Marriage: Now That It Is Legal In All States, What Are The Tax Implications?
Alex Franch, BS EA
Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm.
Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.
Alex Franch is a registered representative of and offers securities and investment advisory services through Commonwealth Financial Network, A registered broker-dealer, Member FINRA/SIPC.