A US citizen or US tax resident (e.g., one who holds a green card) who is married to a non-American when the couple lives abroad should consider certain US tax filing implications.
Non-American Spouse Treated as a US Tax Resident
When the non-US citizen spouse has obtained a green card or is otherwise treated as a so-called “resident” alien due to prolonged physical presence in the US, the question arises as to the US income tax treatment of that foreign spouse. Even if both spouses reside abroad, the non-US spouse who has the tax status of a “resident” alien, will be taxed in the same manner as the US citizen spouse. This means that the world-wide income of each spouse will be taxed by the US government. It must be understood that worldwide income includes salaries and wages earned overseas as well as any investment income (e.g., dividends, interest), capital gain income and so on, even if that income is earned in a foreign country and even if it is solely owned by the “foreign” spouse.
In this situation, with two “US” spouses, it is more tax beneficial if the couple chooses the filing status “Married Filing Jointly” (MFJ). Using the MFJ status generally means that each spouse will qualify for the foreign earned income exclusion (for tax year 2014 this amount is $99,200; you can learn more about it here Foreign Earned Income and Housing Exclusions); the couple will get a larger standard deduction amount and each will be able to claim a personal exemption amount. Tax rates are lower when filing MFJ versus “Married Filing Separate” (MFS).
Non-American Spouse Is So-Called “Nonresident Alien”
If the non-US spouse does not have either a green card or “resident” alien status, the individual will be classified as a nonresident alien (NRA). In this situation, the couple cannot file tax returns using MFJ status. The US taxpayer cannot automatically file a joint income tax return with the NRA spouse in order to obtain the benefits of the lower joint tax rates, additional personal exemption, and higher standard deduction amounts. The US taxpayer would have to file using MFS status. In this case, the income of the non-US spouse will not be subject to tax (unless from US sources). It may nonetheless be possible that the US spouse can take a personal exemption for the foreign spouse if the foreign spouse has no US source income and is not claimed as a dependent on another person’s US tax return.
If the foreign spouse is a NRA, it may also be possible for the US spouse to file instead as “Head of Household” (HOH). When a US taxpayer is married to a NRA and has a “qualifying person” also resident in the home (typically this would be the couple’s child) filing HOH is permissible. Using HOH filing status means that lower tax rates are available, a higher standard deduction amount is available and the income of the foreign spouse need not be reported on the tax return.
A completely different tax result will arise if a decision is taken to treat the foreign spouse as a “resident alien” for US income tax purposes by making a special election. This will be covered in an upcoming blog
UPDATED February 18, 2015
Follow me on Twitter: @VLJeker