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EXPATS WITH A NON-RESIDENT ALIEN SPOUSE

April 28, 2013

By Joshua Ashman, CPA

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U.S. EXPATS WITH A NON-RESIDENT ALIEN SPOUSE: CHOOSING THE RIGHT FILING STATUS

Under U.S. tax law, there are five different filing statuses to choose from when filing your taxes; Single, Married Filing Jointly (MFJ), Married Filing Separate (MFS), Head of Household (HOH) and Qualifying Widow(er) with Dependent Child.   Many people overlook the importance of their filing status generally due to a lack of understanding of the direct impact on their tax return and the various opportunities a certain status may create.  In the context of U.S. expats this question often becomes even more challenging when a spouse is a non-resident alien (i.e., neither a U.S. citizen nor green card holder).

EXPATS CAN STILL FILE AS AN MFJ (MARRIED FILING JOINTLY)

As a U.S. expat it is important to understand that even if you’re married to a non-resident alien, you still have the right to choose to file as a married couple (MFJ).   Your spouse does not need to be a U.S. citizen or green card holder for you to file a joint return.  To file jointly, you will need to attach a statement, signed by both of you, to your first joint return whereby you elect to treat your spouse as a U.S. resident for U.S. tax purposes.

Very often, couples in the U.S. prefer filing a joint return since it allows them to increase their standard deduction (in 2012, it is increased from $5,900 to $11,900) and allows them to “share” their income among the two of them thereby potentially lowering their marginal income tax rate.   However, in the case of a U.S. expat married to a non-resident alien, it isn’t intuitive that one would prefer filing jointly as this would require them to treat their non-resident spouse as a U.S. resident for tax purposes.  As a result, their non-resident spouse will report all of their worldwide income to the IRS and possibly even pay tax on such income to the U.S. Government even if they’re not a U.S. citizen and earned all of their income outside the U.S.   Essentially, making such an election will bring your non-resident spouse into the U.S. tax net when otherwise they would have no reporting or tax obligations to the U.S. Government.

Nevertheless, there are situations when filing a joint return with your non-resident spouse can still prove to be advantageous even to a U.S. expat.  For example, if your non-resident spouse has very little income or assets of their own (either because they’re unemployed or by way of using the foreign earned income exclusion ) or the tax on such income will be limited (either by using foreign tax credits or other planning tools), it may still be worthwhile to include them in your return in order to benefit from the higher standard deduction.  In addition, filing jointly with your non-resident spouse can also allow you take advantage of certain credits that are simply not available to those filing separately, such as the American Opportunity Tax Credit (refundable) and the Lifetime Learning credit (Did you know that these credits are available for qualified foreign institutions? Make sure to visit our blog again in the coming weeks as we will be discussing this in greater detail!).  Furthermore, by filing jointly, your non-resident spouse can make contributions to their own qualified U.S. retirement account such as an IRA and you may be able to deduct this contribution on your tax return.

FILING AS A HEAD OF HOUSEHOLD (HOH) CAN ALSO PROVE ADVANTAGEOUS

At the same time, it is also important to understand that filing jointly is not the only option you have.  In some situations, assuming you qualify, you may also be able to file as head of household (HOH).  Choosing this status may be advantageous as it does not require you to treat your non-resident spouse as a U.S. resident but can, nevertheless, allow you to benefit from higher income thresholds and phaseouts for certain taxes, deductions and credits thereby allowing you to earn a larger amount of income while still qualifying for certain tax breaks.

To summarize, it is important to emphasize that you have flexibility with respect to your filing status and that such status should carefully be chosen after assessing your broader financial and personal situation as there is no rule of thumb that’s suitable for all U.S. expats.  Making the right choice can often allow you to benefit from a lower tax bill and even a few extra dollars in your pocket.  At Expat Tax Professionals we regularly help clients address this issue with practical tax saving strategies and are more than happy to assist you in making the right decision.

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