A US citizen or US tax resident (for example, a green card holder) who is married to a non-American when the couple lives abroad should consider certain US tax filing issues and strategies.
US Tax Treatment of the Non-US Spouse
When the non-US citizen spouse has obtained a green card or is otherwise treated as a so-called “resident” alien due to prolonged physical presence in the US, the question arises as to the US income tax treatment of that foreign spouse. Even if both spouses reside abroad, the non-US spouse who has the tax status of a “resident” alien, will be taxed in the same manner as the US citizen spouse. This means that the world-wide income of each spouse will be taxed by the US government. It must be understood that worldwide income includes salaries and wages earned overseas as well as any investment income (e.g., dividends, interest), capital gain income and so on, even if that income is earned in a foreign country and even if it is solely owned by the “foreign” spouse.
In this situation, with two “US” spouses, it is more tax beneficial if the couple chooses to file the US tax returns using the filing status “Married Filing Jointly” (MFJ). Using the MFJ status generally means that each spouse will qualify for the foreign earned income exclusion (for tax year 2018 this amount is $104,100; you can learn more about it here Foreign Earned Income and Housing Exclusions); and the couple will get a larger standard deduction amount. Tax rates are lower when filing MFJ versus “Married Filing Separate” (MFS) and the standard deduction amount is higher. Refer to the tax charts, below.
Tax Implications When Non-American Spouse is “Nonresident Alien”
If the non-US spouse does not have either a green card or “resident” alien status, the individual will be classified as a nonresident alien (NRA). In this situation, the couple cannot automatically file tax returns using MFJ status. Marriage alone is not sufficient to bestow MFJ status on this dual national couple. This means the US taxpayer cannot simply file a joint income tax return with the NRA spouse in order to obtain the benefits of the lower joint tax rates and higher standard deduction amounts. The US taxpayer would have to file using MFS status. Refer to the tax charts, below, to see the difference in tax results when filing MFJ versus MFS. When filing MFS, the income of the non-US spouse will not be subject to tax (unless from US sources).
If the foreign spouse is a NRA, it may also be possible for the US spouse to file instead as “Head of Household” (HOH). When a US taxpayer is married to a NRA and has a “qualifying person” also resident in the home (typically this would be the couple’s child) filing HOH is permissible. Using HOH filing status means that lower tax rates are available, a higher standard deduction amount is available and the income of the foreign spouse need not be reported on the tax return.
An Election Can Be Made to Change the Tax Result
A completely different tax result will arise if a decision is taken to treat the foreign spouse as a “resident alien” for US income tax purposes by making a special election. Details about this election will be covered in an upcoming blog. Yes, you can elect to treat your non-American spouse as a US tax “resident”. Under the proper set of facts this can be very beneficial.
With the Tax Cuts and Jobs Act (TCJA) the 2018 tax brackets, tax rates, and standard deduction amounts have all been revised. The new rules apply for the 2018 tax year (that is for US income tax returns due for filing in 2019). Below is a summary of the tax rates and standard deduction under the new law:
2018 Tax Brackets
Here are the new 2018 tax brackets:
2018 Standard Deduction Amounts
Note that the personal exemption is completely eliminated.
Posted October 12, 2018
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