Many expats wonder about whether or not they should include their foreign spouse on their US tax return. While it seems like an easy decision, since filing married in the US provides greater tax benefits, it isn’t always the case. But since every situation is unique, it is important to evaluate your situation carefully.This Greenback customer was unsure whether he would incur a greater or lesser US income tax liability by including his foreign spouse on his returns and was very pleased with the decision he and his accountant made.
Meet Jim and Carla
We recently worked with a couple that lived in Poland, Jim and Carla. Jim moved abroad in the late 1980s and hadn’t filed a return for more than 25 years. He found out about his US filing requirement from his foreign bank and was shocked to realize how far behind he really was. He needed to get caught up but wasn’t sure where to begin—or whether or not he should include Carla on his returns. He and Carla had been married for 7 years at the time but were planning to divorce. Would it increase his US income tax liability or would it be beneficial to include her on all back returns?
Getting Caught Up
Jim knew he needed help and came to Greenback at the recommendation of a friend. After reviewing his situation, his Greenback accountant advised him to get caught up using the IRS amnesty program, the Streamlined Program. His failure to file wasn’t purposeful and he was considered ‘low-risk’ by the IRS guidelines. This program offered him the ability to become compliant with the fewest penalties possible.
Like most Greenback clients who are behind on taxes, his greatest fear was that he would have a huge tax liability and was searching for ways to minimize this. His tax situation was pretty straightforward—but he did have an equity release in 2011 and receive over $1 million in stock, which was recognized as taxable income. He was clearly worried that the payout would result in a tax liability.
First, Jim and his accountant decided to file 6 years of back taxes instead of the 3 required under the Streamlined Program. After much research, Jim’s accountant discovered that Jim had a sizable number of Foreign Tax Credits available to him that could be carried over from prior years. These credits would help offset the large tax liability incurred from that payout. But in order to take advantage of those credits, they needed to file 6 years of US income tax returns.
His accountant calculated his tax liability both filing with his spouse and without. It was determined that he would have a sizable tax liability if he filed single. Since Carla was a stay-at-home mom, she had no income and no reporting requirement of her own. Including her on the return and filing married joint would not have any negative financial impact on her, but a decidedly positive one for him.
In this case, it was extremely beneficial to include his spouse on his return but it took quite a bit of research to come to that conclusion. Jim got caught up on his back tax returns, became compliant with his US tax obligations and fortunately incurred no tax liability.
Want to know more about filing your US income tax return with a foreign spouse?
Our expert CPAs and IRS Enrolled Agents can help you determine the most beneficial way to file your US income tax return with a foreign spouse. Contact us today for more information!