Living in Singapore I come across more instances where one spouse is American and the other is not than I did while I was living in the U.S. The question invariably arises as to how the spouse who is American should file his/her tax return. Should he/she file separately? Jointly with his/her non-citizen spouse? What are the rules and which is the best alternative?
Couples in this situation are fortunate in that they have a choice of which way to file and can choose the option which results in the least amount of tax to them.
Determining which alternative is right for each situation involves laying out all the facts and circumstances for the particular case. However, some generalizations can be made. First let's look at the rules.
If on December 31st you are married and one spouse is a U.S. citizen and the other is a nonresident alien, you can choose to treat the nonresident alien as a U.S. resident.
OK, let's stop right here since I may already be using tax terminology which some of us may be unfamiliar with.
We all know what a U.S. citizen is, but what is a nonresident alien? Basically, a nonresident alien is someone who is not a U.S. citizen, does not possess a Green Card and has not spent a substantial amount of time in the U.S. during a given tax year. The actual term for this last test is called the “substantial presence test” and involves counting the number of days in which the individual was in the U.S., not only in the current year, but also in the 2 years immediately preceding the current year. But I don't want us to get bogged down in these details so I'm going to move on. If you're interested in learning more about the substantial presence test you can refer to IRS Publication 519 (U.S. Tax Guide for Aliens).
Assuming we have determined that our spouse meets the definition of nonresident alien, you are probably wondering why, then, would we want to treat him/her as a U.S. resident?
Three very common reasons for doing this are so that the U.S. citizen spouse can:
Sounds good right? So then why wouldn't everyone choose this option?
For the simple reason that by making this choice the nonresident alien spouse is treated as if he/she is a U.S. citizen for tax purposes and is, therefore, required to report all of his/her worldwide income on the joint income tax return just like the U.S. citizen spouse is required to do. But just like the U.S. citizen spouse, the nonresident alien spouse may also be allowed to exclude up to $80,000 of his/her foreign earned income from tax and so the burden of this spouse having to report his/her worldwide income on the return might not be so great.
Let's take an example: Norman Smith, a U.S. Citizen, is married to Pat, a nonresident alien. Both lived and worked in Dubai for all of 2002 and they have no children (I chose Dubai because there is no income tax in that country and I did not want to complicate the example with the foreign tax credit).
Norman earned $150,000 while Pat earned $40,000 and both qualify for the $80,000 exclusion while Norman also qualifies to take a housing exclusion of $20,000.
If Norman were to file a separate tax return (without Pat's income) his income would be computed as follows: Norman's earnings ($150,000) - his foreign earned income exclusion ($80,000) - his housing exclusion ($20,000) - his standard deduction ($3,925) - his personal exemption ($3,000) = $43,075 and the tax on this amount, using the married filing separately tax table, would be $8,527.
On the other hand, if Norman and Pat were to file jointly then the computation would go as follows: Norman's and Pat's earnings ($190,000) - their foreign earned income exclusions ($120,000) - Norman's housing exclusion ($20,000) - their standard deduction ($7,850) - their personal exemptions ($6,000) = $36,150 and the tax on this amount, using the married filing jointly tax table, would be $4,822.
A tax savings of $8,527 - $4,822 or $3,705!
(Please note that if Pat and Norman had at least one child then the savings would be negligible as Norman would be able to use the head of household tax table which is the same table as the married filing jointly tax table).
To make the choice to treat the nonresident alien as a U.S. resident you need only attach a statement signed by both spouses to the joint return for the first year for which the choice applies. The contents of this statement can be found in IRS Publication 54 (Tax Guide for U.S. Citizens and Resident Aliens Abroad).
Once made, the choice to be treated as a U.S. resident applies to all later years unless suspended or ended in one of the ways shown in Table 1 1 in Pub 54. One of the ways to end the choice is to revoke it in a signed statement attached to the tax return for the year that the revocation is desired. Once revoked, however, this decision is permanent and cannot be changed without express consent from the Internal Revenue Service.