8 Tax Tips for Americans Marrying Non-U.S. Citizen Spouses

Important Tax Tips for Americans Marrying Non-U.S. Citizens

Important Tax Tips for Americans Marrying Non-U.S. Citizens

When a U.S. person marries a non-U.S. citizen, there are various twists and turns that they must be aware of when it comes time to file U.S. tax returns. Whether or not a non-U.S. citizen is also a non-U.S. person for tax purposes will impact whether they are subject to U.S. tax on their worldwide income (worldwide income taxation rules apply to more than just U.S. citizens).   If the non-us citizen is a Lawful Permanent Resident or foreign national who meets the Substantial Presence Test, they may be able to qualify for certain treaty elections so that they can avoid having to file a Form 1040 and instead can finally form 1040-NR to report only their US sourced income instead of their worldwide income. This may also impact the extent of the international information reporting that the taxpayer must file, which is especially important in situations in which the non-U.S. citizen does not intend on becoming a U.S. citizen and does not want to disclose their foreign accounts, assets, investments, and income to the U.S. government.

U.S. Person Status or Non-U.S. Person 

The first thing to determine is whether the foreign person is a non-U.S. citizen but a U.S. person for tax purposes, or is a non-U.S. citizen, non-U.S. person. In the former situation, the taxpayer is still required to file a tax return to report their worldwide income if they are a Lawful Permanent Resident or foreign national who meets the Substantial Presence Test (unless a treaty exception or other exclusion applies). This is because the United States follows a worldwide income tax model, which means anyone who is considered a US person for tax purposes is still required to report their worldwide income.

If it turns out that the taxpayer is not a U.S. person for tax purposes, then the spouses must determine whether they want to make a 6013(g) election to file their return together to report their worldwide income. One common source of confusion with many taxpayers (understandably so), is that if a non-U.S. person files jointly with a U.S. person, then the non-U.S. person is still required to report their worldwide income, even though they were a non-U.S. person.

FBAR Reporting

The FBAR refers to foreign bank and financial account reporting. When the taxpayer is considered a U.S. person for tax purposes — even if they are not considered a U.S. citizen — they are required to file the annual FBAR in any year that they meet the reporting threshold, even if they make a treaty election to be treated as a foreign person for tax purposes. Noting, there is currently a case pending, Aroeste, in which the taxpayer took the position, and the court agreed that since the taxpayer qualified to be treated as a foreign person under a treaty, the FBAR should be required– but the US government disagrees and is pursuing an appeal.

An important fact to note is that even if a non-us person makes a 6013(g) election to be treated as filing a joint tax return with a U.S. person, that does not make them a U.S. person for FBAR filing purposes.  Stated another way, if a non-U.S. Person makes an election to file jointly with their U.S. Person spouse, while the non-U.S. person must report their worldwide income the foreign spouse is not required to file the FBAR — although the form 8938 could be required.

International Reporting

in addition to the FBAR, there are various other international information reporting forms that the taxpayer may have to file if they are considered a U.S. person and/or are filing joint tax returns.

Some of the more common forms include:

• • • Form 3520

    • Form 3520-A

    • Form 5471

    • Form 8621

    • Form 8865

    • Form 8938

Joint and Several Liability (Joint Returns)

Even though the foreign spouse may not be a U.S. citizen, if they file jointly with their American spouse, any penalties or taxes due are typically considered joint and several– which means that either taxpayer may be responsible for the outstanding tax or penalty liabilities.

What if the Foreign Money Remains Overseas?

Another common misconception we find is that in a situation in which a foreign spouse lives overseas and generates all of their income from foreign sources (and is filing jointly with their spouse), but does not repatriate the money to the U.S. In that situation, even if the foreign spouse does not bring the money to the U.S. they still report the income on their U.S. tax return as income. The foreign spouse does not need to repatriate any money from overseas to the United States for the income to still qualify as income for U.S. tax purposes. If the foreign spouse files a joint 1040 tax return with an American spouse, then all of the income is required to be included from both parties.

Were Foreign Taxes Paid?

If the foreign spouse earned money overseas and paid taxes overseas, then they may qualify for a foreign tax credit on their U.S. tax return so that they do not have to pay double tax on the income. In other words, the foreign spouse reported their foreign income, along with their foreign taxes paid so that they are not paying double tax on some, if not all of the foreign income (the foreign tax credit is not always a dollar-for-dollar credit).

Foreign Business Ownership

When a foreign spouse becomes a US person, even if they are not filing a joint tax return, if they are a U.S. person for tax purposes then they may have a Form 5471 or Form 8865 filing requirement. There are many different categories of filers who have to file these forms, but one sneaky subcategory of Category 3 on Form 5471 where in any year that the taxpayer became a U.S. person and owns 10% or more of a foreign corporation, they have to file the Form 5471 (even if they did not technically ‘acquire’ the ownership in that year because they acquired U.S. person status). If it turns out the taxpayer is an owner of a foreign company that is considered a controlled foreign corporation, then they may have an annual form 5471 filing requirement.

Foreign Rental Property (Even if Net Loss)

One other common issue we find with foreign returns is that the non-U.S. citizen spouse may have foreign rental properties, but they generate an overall loss instead of a gain and so the income is excluded from their tax return. Nevertheless, even if the Expenses outweigh income so that it nets a loss, the foreign rental property is still required to be reported on the US tax return using Schedule E.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.