Nonresident Alien Spouse
In this day and age, with businesses going global and worldwide travel being so easy, it is becoming more and more common to see marriages occurring between a U.S. citizen/U.S. resident alien and a resident of another country. These marriages trigger significant tax consequences.
U.S. resident aliens are individuals who have become permanent U.S. residents but are not U.S. citizens. To be classified as a U.S. resident alien, the individual must be a “green card” holder or meet a “substantial presence test” that is based on time spent in the U.S in the current and prior two years. For U.S. income tax purposes, a resident alien is treated the same as a U.S. citizen and is taxed on worldwide income.
However, being married to a non-resident alien complicates the selection of a filing status for U.S. tax return purposes and requires the couple to make one of two possible elections:
-
Married Filing Jointly – For a citizen/resident to file a joint return with a non-resident spouse, the taxpayers must include and pay U.S. taxes on the worldwide income of both spouses on their joint U.S. tax return, or
-
Married Filing Separately – If they choose not to file jointly, then the citizen/resident spouse files a married separate return without the income of the non-resident spouse and pays U.S. taxes on only his or her worldwide income. If the non-resident spouse has U.S. source income, the non-resident spouse may also have to file a U.S. income tax return using the married filing separate status on that return.
The choice of filing status has significant tax implications. If filing jointly, the taxpayers enjoy the lower tax rates of the married filing jointly filing status, have a higher standard deduction ($25,900 for 2022, as opposed to $12,950 for married individuals filing separately). On the other hand, if the non-resident spouse has significant income, especially non-U.S. source income, it may be a better choice for the U.S. citizen/resident to file married filing separately without the non-resident spouse’s income.
Higher income taxpayers with investment income are subject to a 3.8% surtax on net investment income; this surtax has an income threshold of $250,000 for married taxpayers filing jointly and $125,000 for those filing as married filing separately (these amounts are not inflation adjusted). However, individuals filing as non-resident aliens are not subject to this surtax. Therefore, when weighing the pros and cons of making the election to treat a non-resident alien spouse as a U.S. resident, the effect of the 3.8% tax on the couple’s total tax picture must be analysed.
Another issue to consider is that when one spouse is a non-resident alien, the earned income tax credit can only be claimed on a joint return.
To make the election to file jointly, both parties must make the election by attaching the required statement, signed by both spouses, to the joint return for the first tax year for which the choice applies. Generally, this will require obtaining an individual taxpayer identification number (ITIN) for the non-resident spouse because the non-resident spouse probably will not qualify for a Social Security number.
Once made, and as long as one of the spouses is a U.S. citizen or resident, the election applies not just for the year for which it is made but for all future years until it is terminated. If the election is terminated, neither spouse is eligible to make the election for any subsequent tax year. (Code Sec 6013(g)(6))
Terminating the Election – The election terminates at the earliest of any of the following events:
-
Revocation by taxpayer or spouse - Either spouse may revoke the election by filing a statement of revocation by the due date for filing the tax return for the tax year.
-
Death – Death of either spouse terminates the election beginning with the first tax year following the year the spouse died. However, if the U.S. citizen or resident spouse is the surviving spouse and meets the requirements for the qualified widow(er) status, the election continues for two years following the death of the non-resident spouse.
-
Legal separation - If the couple legally separates under a decree of divorce or of separate maintenance, the election terminates as of the beginning of the taxable year in which the legal separation occurs.
-
IRS action – The IRS may terminate the election for any tax year for which it determines that either spouse has failed to keep or provide sufficient books, records, and other information with which to determine tax liability. (Reg. §1.6013-6(b)(4))
-
Other Issues:
-
ITIN - The non-resident spouse will need an ITIN if the election to file a joint return is made. An ITIN for the non-resident spouse is not needed if the resident spouse files MFS. Page 14 of the 2021 Form 1040 instructions indicates that where filing MFS and a spouse is not otherwise required to have an ITIN or SSN, enter “NRA” in the space on the 1040 for the SSN/ITIN.
-
FBAR - Filing joint with a non-resident alien spouse may also trigger a FBAR filing requirement.
-