Non-American Spouse: US Tax Implications

US Tax Implications of a Non-American Spouse

by Jane A. Bruno, J.D.

It is quite common for Americans living overseas to meet and marry a non-American. Often the couple stays overseas and the foreign spouse acquires no US status. In this case, the spouse will be known as a “non-resident alien” spouse in tax lexicon. In other cases the foreign spouse will acquire a US status either by living in the US or acquiring US citizenship. What filing status to use and how to treat the foreign spouse’s income is a source of great confusion for many taxpayers. This brief article will discuss the basic rules in both case. It does not cover rules of reporting joint or separate foreign accounts to the Treasury Department or on Form 8938.

Spouse is considered "nonresident alien (NRA)" for U.S. tax purposes

If your spouse has neither a green card nor resident alien status, he/she will be classified as a nonresident alien (NRA). If this is the case, the couple has two choices:

1. Choose to treat spouse as resident alien for tax purposes.

If you go this route, you must understand that you will have to report your spouse's worldwide income and it will be subject to U.S. tax. You also should realize this is an active choice you make and there are certain procedures that must be followed to make it effective (See IRS Publication 519):

• You have to attach a statement, signed by both spouses, to your tax return for the first year to which the choice applies. The statement must include a declaration that one spouse is a nonresident alien and the other is a U.S. citizen or resident alien, and you are choosing to both be treated as US residents for the tax year.
• You also have to include the name, address and Social Security number (or Individual Taxpayer Identification number) of each spouse. This means the non-resident alien spouse must have either (1) a Social Security number, which can be obtained by completing Form SS-5 (available at www.socialsecurity.gov) and submitting it to the Social Security Administration or a US Consulate or (2) if the spouse, is not eligible for a Social Security number, filing a Form W-7, Application for IRS Individual Taxpayer Identification Number, either separately or with the tax return. (http://www.irs.gov/pub/irs-pdf/fw7.pdf)
• For the first year you make the choice, you have to file a joint return. But in later years you can file joint or separate returns. It is also important to realize you must continue to file this way (treating both as US citizens or resident aliens) unless you (or circumstances) end the choice. This can happen if either spouse revokes the choice in writing, either spouse dies, you have a legal separation or divorce, or the IRS ends the choice because it feels you haven't kept adequate records.

You might wonder why you would go to all this trouble, especially if you have to declare the foreign spouse's income. The main reason is you will use the "married, joint" filing status which gives you a higher standard deduction and many other benefits that are not available if you use the "married, separate" filing status.

2. Choose to treat spouse as nonresident alien for tax purposes.

If you decide you don't want to include your NRA spouse's income on your U.S. tax return, you generally will have to use the filing status of "married, separate".

If you file as “married, separate” AND your spouse has no income from sources within the US AND is not claimed as a dependent of another US taxpayer, you CAN claim an exemption for your NRA spouse (See IRS Publication 17).  [This is for tax years 2017 and previous--starting in tax year 2018 there is no personal exemption.]  You need to be sure to obtain an Individual Taxpayer Identification number for your spouse before filing the return. http://www.irs.gov/pub/irs-pdf/fw7.pdf

Head of Household Status—if you have persons that may qualify you to use “Head of Household” status (such as a child living at home that is a US citizen) and you choose to treat your spouse as a non-resident alien, you can use the Head of Household filing status. Note that the foreign spouse is not a qualifying person for Head of Household purposes. (See IRS Publication 17 for details on who is a “qualifying person”) The tax rates and standard deduction for this filing status are much superior to that of the "married, separate" filing status.

Unlike the "choice" you made with regard to treating your spouse as a resident alien, there is no additional paperwork involved with treating your spouse as a nonresident alien for tax purposes. And if you find that the "married, separate" status has too many negative tax implications, you may decide that in future years you want to file "married, joint" by simply making the choice and attaching the statement described above.

Spouse has "green card" or is otherwise considered "resident alien"

If your spouse has obtained a green card, is a naturalized US citizen or is otherwise considered a resident alien, the situation is relatively simple. Even if you both live overseas, as long as your spouse has the status of a resident alien, he/she will be taxed as if he/she was a US citizen. This means world-wide income is taxed for both of you. Not only is the earned income of each spouse subject to US.taxation, but any investment income, even if earned in a foreign country with the foreign spouse as the sole recipient, is subject to US tax and US reporting requirements for foreign accounts. The good news is that you can use the filing status of "married, joint" so that you get a higher standard deduction and a personal exemption for each of you. Also, if you each qualify for the foreign earned income exclusion, you can exclude up to $103,900 (for tax year 2018) per person per year of foreign income.

• Note: If your spouse is a citizen of another country (while also a resident alien in the US), and you happen to live in that country, special rules may apply. In the event the US has a tax treaty with that country, you should take a look at the treaty and/or consult a tax professional in that country.

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Jane Bruno is a tax consultant with 30 years of experience with Americans overseas.

This ACA webpage updated in February 2019.