You are an American expat and you just got married to your exotic, foreign love. Congratulations! We wish you a life full of happiness, health and uncomplicated tax filings.
As newlyweds, you probably have a million more important things on your minds than filing US tax returns. But, before you know it, mid-April will be here and you need to be well-informed of your choices before you make the call on how to file.
Your Spouse’s Status
If your new bride or groom is the proud holder of a green card or a US citizen, they still have to file their own US tax return, despite living abroad. If this is the case, you might want to consider filing jointly as the benefits are greater. Filing a joint return allows you a higher standard deduction and a personal exemption for each of you.
If, on the other hand, your spouse has no status in the US, you have some decisions to make. There are three different filing options from which you can chose, each one with its own advantages and disadvantages.
Three Choices
Married Filing Jointly (MFJ)
If you decide to go this route, keep in mind that you will have to register your foreign spouse as a bona-fide US tax payer. They will be assigned their own US Social Security Number or Individual Taxpayer Identification Number and he or she will from then on be “on the radar” of the IRS. Regardless of their previous status, if you file jointly, your spouse will become a “resident alien” and they will immediately enter into US tax liability.
As scary as all that sounds, however, if your spouse does not earn a high income, or earns nothing at all, MFJ is your best financial bet. Firstly, filing under this category will considerably reduce your tax liability. And secondly, by filing jointly, you are able to apply both your and your spouse’s deductions AND exclusions to your combined income, even if the income is only your own.
Married Filing Separately (MFS)
On the other side of the tax coin, you and your spouse may choose the MFS option. Under this filing category, your spouse receives the status of “non-resident alien” and they will not have to file and pay US taxes.
MFS is your best option if your spouse’s income is substantial or if they have a very high future earning potential including pay raises, inheritances or stock dividends. This is also the best category to file under if your spouse presently has significant investments or assets that could at some point necessitate extra filing requirements relating to the Report of Foreign Bank and Financial Accounts (FBAR) and to the Foreign Account Tax Compliance Act (FATCA) which then must be filed with the Financial Crimes Enforcement Network (FinCEN, a bureau of the Treasury Department). As well, if you file jointly, you and your spouse could also be liable to US capital gains taxes.
This added level of complexity may be worth the trouble if you want to exclude your spouse’s finances from the IRS. Another advantage to filing MFS is that you can actually turn over any of your earnings or investments to a non-status spouse over time and thus not pay US taxes on those gifts.
Head of Household
If your spouse has non-resident alien status, you might want to consider filing under the head of household category. If you chose this route, you will be considered “unmarried” under IRS rules and your spouse will therefore not qualify as your dependent.
In order to be eligible to file as head of household, you must be responsible for at least half of your household’s living expenses. You must ALSO have another resident who qualifies as a dependent under the rules and guidelines of the IRS. For example, you must have at least one dependent child residing with you who is a US citizen with a social security number. You may also claim an exemption for any one of a list of relatives including (but not exclusive to) a parent, grandparent, sibling, and brother, sister, mother or father in law.
The advantages of filing as head of household are similar to the advantages of filing separately, Filing under this category allows you to leave your non-resident alien spouse outside of US tax liability, but it affords you a higher standard deduction and lower effective tax rates.
This is just a brief and straightforward overview of the choices you have when filing your tax returns as an expat married to a foreigner. On such as crucial matter as this, however, we strongly recommend consulting a US expat tax expert who can guide you through the nuances and intricacies of the process and advise you what is best in your personal situation. With this taken care of, you can then proceed with peace of mind to the more important and definitely more enjoyable aspects of newlywed life!
