My blog post containing tax-saving tips for the filing of a US income tax return when one is married to a non-resident alien spouse is here. It will be helpful to read that post before embarking on this one as it sets out the basics and provides the income tax rates and brackets for the 2018 tax year.
Electing to Treat the Foreign Spouse as a US “Resident”: The Section 6013(g) Election
One can actively choose to treat the foreign spouse as “resident” alien for tax purposes by making what is known as an Internal Revenue Code Section 6013(g) election. Making the election generally means the couple can file the US income tax return using “married filing jointly” or, MFJ, status.
Whenever I discuss this with clients, they cannot imagine it would ever be a good idea to treat the non-US spouse as a US “resident” for income tax purposes. In certain cases, however, this can be very advantageous. For example, tax benefits can result because of the lower tax rates and larger deductions that are available when the couple can file using MFJ status. Tax benefits can also arise because of foreign tax credits attributable to the foreign spouse. These credits can be used to offset US tax liability on foreign source income. Tax benefits can result, too, if one spouse is not working or that spouse’s income is excluded under the foreign earned income exclusion. In these cases, there is no additional income on which the couple would pay tax, but they would still get all the benefits of MFJ status.
Making the 6013(g) election means that each spouse must report and pay tax on his / her worldwide income. For the first year the election is made, the couple must file a joint income tax return. In subsequent years, the couple can file joint or separate tax returns, but each party must continue to be treated as US persons, reporting worldwide income, unless the election is revoked or otherwise terminated.
Once made, the election remains in effect for all subsequent tax years unless it is somehow terminated. This can occur in one of several ways – the taxpayers revoke the choice in writing, either spouse dies, a legal separation or divorce occurs, neither spouse is a US citizen or resident at any time during the year, or the IRS terminates the election (usually because it determines adequate recordkeeping has not been met).
Certain pitfalls in making the election should not be overlooked. A significant disadvantage to the election is that it can be made by a taxpayer only once in a lifetime. Thus, once the election is terminated for any of the aforementioned reasons, it will not be possible to make the election again with the same or a different spouse. For example, if the taxpayer divorces and remarries, or the taxpayer’s spouse dies, and the taxpayer later re-marries, the election cannot be made again.
Procedure in Making the Section 6013(g) Election
Making the election requires adherence to certain procedures including attaching a special statement to the tax return for the year the choice is first being made. This statement must be signed by both spouses and must contain certain identifying information as well as the Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) of each spouse.
To obtain an ITIN, use Form W-7.
FinCEN Form 114 (FBAR) and Form 8938
In all cases, careful attention must be paid to so-called FBAR filings and filing with respect to “specified foreign financial assets” on Form 8938.
You can read more about FinCEN Form 114, FBAR, at my US Tax Primer, here.
Generally, under certain circumstances, US citizens and US residents must annually file a so-called FBAR with regard to foreign (non-US) financial accounts. The determination of whether an individual is a US “resident” for FBAR purposes is to be made without regard to having made the Section 6013(g) election. This means if Wilma, a US citizen is married to Harry, a non-US citizen who has made a Section 6013(g) election, Wilma must file an FBAR if she meets the reporting threshold for foreign financial accounts in which she has either a financial interest or signature authority. Assuming Harry has made only the Section 6013(g) election, but is not otherwise a US resident, Harry need not file an FBAR. Wilma must be careful to include in her FBAR any financial accounts she jointly owns with Harry (or over which she signature authority) and she must report the highest value of the entire account, not just the value of her one-half. The facts must be re-examined each year to ensure FBAR filings are correct.
With regard to “specified foreign financial assets” reportable on Form 8938, different dollar threshold limitations apply based on certain factors such as US versus non-US residency of the taxpayer, marital status and tax filing status. All of these nuances are pointed out in the Instructions which should be carefully read. Form 8938 and Instructions can be found here .
If required, the Form 8938 is required in addition to the so called “FBAR”. One does not replace the other. Unlike Form 8938, the FBAR (FinCEN Form 114) is not filed with the IRS. It must be filed directly with the office of Financial Crimes Enforcement Network, a bureau of the Department of the Treasury which is separate from the Internal Revenue Service (IRS).
The IRS has issued a useful chart comparing the Form 8938 and FinCEN Form 114, FBAR.
Posted October 14, 2018
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