Non-American Spouse: Claiming Spousal Exemption
ACA was asked the following question: “According to my tax adviser, the nonresident alien (NRA) spouse cannot be used as an exemption when the US spouse is filing as 'married filing separately' even if the NRA spouse has no US income and has an ITIN."
"To be precise, my non-US wife has an individual taxpayer identification number (ITIN) but no US-source income. I am filing as "married filing separately." I want to list my wife as an exemption. My tax adviser says I can't do that because my wife has foreign (retirement) income. Is that correct?"
The answer proved to be somewhat elusive, with various tax preparers giving various interpretations, due to somewhat unclear wording in IRS publications and recent changes in the tax law. For tax years 2017 and previous, IRS Publication 501 Exemptions, Standard Deduction and Filing Information that in this situation, one can claim an exemption for your spouse only if the spouse had “no gross income.” IRS Publication 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad says the same thing, specifying that the nonresident alien spouse can have no gross income “for U.S. tax purposes.” The situation changed in tax year 2018 due to the fact that there is no longer any personal exemption.
ACA thanks the US Embassy in Paris for answering this with clear guidance:
“Please be advised that it is permissible and lawful under IRS rules to claim the spousal exemption (for the non-US spouse) when married filing separately.
“The law allows this only if the spouse has NO income. For US tax purposes, NO income (for Nonresident Aliens) is defined and construed as meaning NO US-source income. If the foreign spouse has a foreign retirement pension that is non-US source, this does not conflict with the claiming of the spousal exemption.”
Tax expert Geoffrey DeHaven clarifies: “Since foreign income of a NRA alien is never included in US taxable income, it would never be included as part of gross income. Accordingly, it should not matter whether the foreign spouse (NRA) had any foreign income – as long as there is no US source income.” He also adds, “Note that the ‘increased amount’ for being 65 or older serves to increase the standard deduction amount - not the exemption. [In the situation described], the personal exemption amount is not increased as a result of turning 65 years old." Starting in tax year 2018 there is no personal exemption, however the standard deduction is increased by $1,600 (over 65 single or married filing separately for tax year 2018) or $1,300 (over 65 married filing jointly).
The application for an ITIN is available online.
This ACA webpage updated in February 2019.