Moving overseas is an exciting experience that is full of adventure and challenges. Many US expats living abroad meet their loved one and get married. Filing US expatriate tax returns on overseas taxes is even more challenging for American expats who file with a nonresident spouse. Foreign spouse income tax issues and choosing the correct tax return filing status add the additional layer of complexity.
This is an email from one of our clients, American expats living abroad. “I moved to Brazil two years ago. I am even more puzzled than ever with the latest IRS overseas tax requirements like FBAR, FATCA. However, in my case I got married in the beginning of the year. My spouse is a green card holder but she has lived in Brazil for the last 2 years. I would like to find out more about the foreign spouse income tax consequences and the best filing status.”
US overseas tax requirements filing with a foreign spouse
Foreign spouse is a green card holder
One of the scenarios that American expats can face is a nonresident spouse who is a green card holder. Earlier we discussed green card tax requirements. Many green card holders mistakenly assume that they are not required to file US expat tax returns on overseas taxes because they are not US citizens. Unfortunately, this assumption is far from being correct. A failure to file American tax returns can lead not only to the tax problems with the IRS but also to the immigration issues.
Foreign spouse with a green card is subject to the same US expat tax filing requirements on overseas taxes as a US citizen. Consequently, a US citizen filing with a nonresident spouse must report the combined worldwide income per the IRS. American expats must remember that the worldwide income includes wages, salaries, dividends, interest income, capital gains, self-employment income and assets.
Married Filing Jointly with a foreign spouse
Since both spouses are required to file a US expat tax return on overseas taxes, the best filing status for a couple is to file Married Filing Jointly (MFJ). Choosing the MFJ status qualifies the couple for a larger standard deduction. In addition to this, each spouse can claim a personal exemption that determines the foreign spouse income tax. Moreover, the tax rates are more beneficial for a filing status “Married Filing Jointly”. The biggest advantage of filing with a nonresident spouse is the fact that each spouse can claim the foreign income exclusion and exclude up to $101,300 in a tax year 2016 and up $100,800 in a tax year 2015. The total amount of the FEIE claimed by both spouses can be up to $202,600 in a tax year 2016.
The foreign spouse income tax consequences and choosing the right filing status play a key role in the US expat tax liability. American expats must contact a US expatriate tax preparer that specializes in international tax preparation and overseas taxes.