Why Your Foreign Spouse May Not Want to Be On Your Expatriate Tax Return

Living in the United States, most married individuals may prefer to file jointly. Both are required to report worldwide income, its easier, and several credits and tax cuts are only available to those that are filing jointly, rather than separately. Overall, filing jointly is administratively easier – take all the consolidated information for the year, and put it in the tax return. However, when living abroad, and should a spouse be a foreign national, it may be better to not file jointly on your expatriate tax return.

What Are the Benefits of Filing Jointly?

Several important tax credits are available only to those filing jointly, or available but greatly reduced for those filing separately:

  • Child and Dependent Care Credit- This is a credit for those with dependents and who incurred costs in having them cared for while the taxpayers work.
  • American Opportunity Credit- Credit received for payments made towards higher education
  • Earned Income Credit- Refundable Credit based on income level

Tax credits are a great expatriate tax saving tool, as the credit amount is a dollar for dollar reduction of the tax liability.

Furthermore, another disadvantage of filing separately would be that should one spouse choose to itemize deductions, the other partner must as well. In addition, contributions to IRA accounts are extremely limited by a reduced Modified Adjusted Gross Income limit. For 2013, the phase-out limit moves from $178,000 – $188,000 (ROTH, traditional is $95,000 – $115,000) for those filing jointly, to $0 – $10,000 for those filing separately – meaning if over $10,000 is earned, there is no more deduction available. Finally, the total income tax liability is generally (but not always) lower for individuals who file jointly rather than separately due to the tax rates and tax computation.

Why Would I Want to File Separately?

In some circumstances it makes more sense to file separately. First off, liability is limited to the individual filing the return. As such, one spouse would not be liable for the other’s tax obligations. In a situation where a couple has a significant amount of miscellaneous itemized deductions that are subject to a percentage of Adjusted Gross Income (AGI), it helps to have a lower AGI. This may be accomplished by filing separately, and separating out the two incomes.

Once a foreign national spouse files jointly, the United States requires that all worldwide income be reported. Any income attributable to the foreign spouse (which may have never ended up on the United States return), will need to be disclosed and possibly taxed by the United States. In addition, joint filing may open up foreign holdings the spouse retains control over to US reporting requirements. For instance, the couple may need to report foreign bank accounts, trusts, business interests or other items under the sole control of the foreign national spouse. Failure to do so at this point could result in steep penalties and possible criminal prosecution. Even in the situations when the foreign national spouse has absolutely no income, individuals should consult with a tax professional to weigh the options of filing jointly, as there are long-term effects that should be considered.

Long-Term Implications of Filing Jointly

A foreign national spouse isn’t automatically allowed to file jointly on a US expatriate tax return. So, should the US taxpayer wish to file jointly, an election must be made to have the foreign national treated as a US resident. A statement is prepared for the tax year in question, and attached to the return. However, this election is permanent, and the foreign national will have a permanent filing obligation with the United States, or until both individuals are no longer US Citizens or residents. This could become problematic! Let’s say the foreign national spouse can eliminate his/her income with the tax concessions offered by the US (Foreign Earned Income Exclusion and the Foreign Tax Credit) in the first several years, but is unable to do so in future years. Now that income is open US taxation and had they not been included on a US expatriate tax return, the US couldn’t touch it.

Individuals should note, that the election to treat a foreign national spouse as a US resident does provide the taxpayers one chance to revoke the election. To do so, individuals need to attach a statement listing out that they wish to revoke the election, any community property, and the likes–and attach it to the return. If the election is revoked, it cannot be taken in future years. This holds true even if individuals remarry at a later point. As such, the decision to take the election should be carefully reviewed. Furthermore, the financial situation of the foreign national spouse should also be evaluated to determine if it is worth opening up the foreign holdings to the US tax authority.

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