Some people move abroad for love. Others find love while abroad. Marrying someone from a different country is an adventure in itself. Furthermore, your foreign spouse may also impact your US tax filing.
As a US expat married to a nonresident alien – someone with neither US citizenship nor a Green Card – you have some choices to make. Generally, married couples must either file jointly or file separately. It depends on the circumstances if claiming your foreign spouse on your tax return is beneficial or not.
If you are new to expat taxes, check out our Expat Tax Guide.
Filing jointly with a foreign spouse can lower your tax bill – but not always
In some cases, you can significantly lower your tax bill by claiming your foreign spouse on your tax return. However, in some instances filing separately would save you money.
Here are three key considerations for married filing jointly or separately with a foreign spouse:
1. Tax impact of foreign spouse’s income and assets
If your foreign spouse has little or no income, filing jointly can help lower your tax bill. In order to do that, your spouse must obtain an Individual Taxpayer Identification Number (ITIN).
On the other hand, if your foreign spouse has a high income and/or high-value investments and you include your spouse in your filing, your tax liability would significantly increase. In that case, it may be better for you not to file jointly.
If you file separately, you could shelter up to $149,000 (2017) of your assets from reporting (on the FBAR or Form 8939) and also from US taxation on the income from these assets by gifting them to your non-resident foreign spouse. Of course, gifting significant assets only to avoid taxes and disclosure requires a substantial amount of trust in the foreign spouse.
2. Deductions and exclusions
If you choose to file a joint return with your foreign spouse, you can be eligible for higher deductions and exclusions, depending on the combined income levels.
Especially when it comes to the Foreign Earned Income Exclusion (FEIE), your filing status can make a big difference.
If you file a tax return as “Single,” “Head of Household,” or “Married Filing Separately,” you can exclude up to $101,300 (2016 tax year) from your foreign income by claiming the Foreign Earned Income Exclusion on Form 2555.
If you however opt for a “Married Filing Jointly” return, and you and your spouse both work abroad, you may be able to each exclude up to $101,300 of your earned income, doubling the exclusion.
3. Contributions to tax-deferred accounts
If you don’t include your foreign spouse in your tax filing, your spouse will not be recognized as a US taxpayer. Therefore, he or she will not be able to make contributions to any tax-deferred, US-based account (such as an IRA). Neither will you be able to contribute on his or her behalf.
So, should you include your foreign spouse on your US taxes?
As you can see, there is a lot to consider and we are only scratching the surface of this complex topic. Those three considerations above are important; however, there are more nuances and things to take into account regarding the tax impact of your foreign spouse.
Also, keep in mind that this election to include your foreign spouse can only be made once, and it can only be revoked one time. Consequently, the tax impact of this decision is long-lasting and not to be taken lightly.
A lot of money can be at stake if you don’t have a clear understanding of the options and their consequences. If you need help with your expat taxes, don’t hesitate to reach out to us.