I’ve been receiving a lot of tax questions lately. Many deal with living in the Philippines and Fil-Am relationships. I thought I might share some of them with you.
This article is not an all-inclusive Frequently Asked Questions (FAQ) piece. It’ll cover just a few questions that pop up from time to time, centered on a single topic. After all, there’s a limit to boredom!
If there is positive response to this article, others may follow. Each would cover a single tax topic that would interest you and possibly answer your questions. The fate of future tax-related
articles is in your hands, dear readers.
Today, for our first topic, we’ll consider some questions dealing with U.S. income taxpayers who have nonresident alien spouses. A typical scenario is a Fil-Am couple, one a U.S. citizen or resident income taxpayer, the other a Philippine citizen living in the Philippines.
NB (nota bene – note well): Information provided in this article is current as of this writing. With the current U.S. income tax rules and regulations in a state of flux, change may occur. I will include any such changes as a comment to the article.
If you have a personal tax question regarding this topic, please contact me here or use the similar tab just above this article.
QUESTIONS & ANSWERS
Here are some of the most common questions:
Q1: I’m newlywed, and my spouse is a Philippine citizen living in the Philippines. Which income tax forms and what filing status should I use?
A1: You can file Form 1040, 1040-A or 1040-EZ, depending on the filing status you elect to use, the complexity of your tax situation, and whether or not you are claiming additional dependents. The filing statuses available to you are: Single, Married Filing Jointly (MFJ) or Head of Household (HOH), and should reflect your status as of December 31 of the tax year. Note: Taxpayers claiming dependents other than a spouse, and/or not meeting certain requirements specified by the IRS, cannot file Form 1040-EZ.
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Q2: Can you give me a simple explanation for each filing status option?
A2: Yes! You should choose the filing status that gives you, the taxpayer, the best benefit (least tax liability) while remaining within the boundaries of the Internal Revenue Code.
- Single – If you do not desire to include your nonresident alien spouse in your return, you may file as a Single taxpayer. All income, deductions, exemptions, credits, etc. related to your spouse cannot be included in calculations to determine your tax liability, and are not reported anywhere in your tax forms.
- MFJ – You can elect to treat your nonresident alien spouse as a U.S. resident for income tax purposes alone. This will allow you to file jointly and include your spouse’s tax information with yours. You must attach a written election to your joint return that includes the election wording provided by the IRS and the signatures of both joint filers. If in the future, you desire to stop filing jointly, you must attach a signed statement reporting your stopping to file MFJ to your return.
- HOH – If you do not make the election to treat your nonresident alien spouse as a U.S. resident, but you have other dependents (e.g., children, parents-in-law, etc.) that you wish to claim on your return, you can file as the Head of Household. To use this status, you must pay more than half the cost of maintaining a household for certain relatives or dependents other than your nonresident alien spouse.
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Q3: Is it true that I have to report all of my “worldwide” income in my tax return? What about my spouse’s income?
A3: Yes, regardless of where they live, all U.S. taxpayers must report all income from all sources worldwide, even if they paid tax on all or a portion of that income to another country’s tax agency.
- If you elect to have your nonresident alien spouse treated as a U.S. resident for tax purposes alone, your spouse must similarly report all income from all sources worldwide in your joint return.
- If you do not elect to have your nonresident alien spouse treated as a U.S. resident for tax purposes alone, and your spouse did not receive any income (earned or
unearned) from a source within the U.S., your spouse is not liable for U.S. income tax and is not required to file a U.S. income tax return. - If you do not elect to have your nonresident alien spouse treated as a U.S. resident for tax purposes alone, and your spouse did receive income (earned or unearned) for a source within the U.S., your spouse is liable for income tax on that U.S.-sourced income alone, and must file Form 1040-NR.
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Q4: You mentioned including income in our tax return that another country already taxed. That’s double-taxation — is that allowed? What can we do about that?
A4: Some income can be double-taxed or triple-taxed (or ever further taxed if you consider state and local income taxes). For an example, a foreign country can tax a cash dividend you receive from a foreign corporation at the corporate level and at your individual level, and then the U.S. can tax it at your individual level. Don’t despair — there are optional steps you can take to even things up a bit.
- You can claim a credit for tax paid to a foreign country on income that the U.S. is also taxing. You can claim this credit for income tax, excess profits tax, war profit tax, and taxes in lieu of income tax. Taxes that qualify are those paid to a foreign country, a political subdivision of a foreign country, and to a U.S. possession. The credit is the lesser of the foreign tax paid or the U.S. tax allocated to the foreign source income. The foreign tax credit is calculated and reported on Form 1116.
- You can elect to deduct the foreign taxes on Schedule A of Form 1040 instead of taking a credit. Exercise caution with this option. Your total deductions may be limited in certain circumstances, causing the benefit for deducted foreign taxes to decrease. Additionally,
- If you elect to claim all foreign taxes paid as a deduction, you cannot claim any foreign tax credit.
- If you claim a foreign tax credit via Form 1116, you can deduct any foreign taxes that do not qualify for the credit.
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Q5: My personal income is substantial, and so is my nonresident alien spouse’s income. What good is it to lump it all together just to have everybody taxing it? A little help here?
A5: Along with the foreign tax credit (and possible deductions) mentioned above, there would be a few more benefits available to you that aren’t really visible when you just look at the surface of your situation. Tax strategies that truly help those in your situation are:
- Electing your nonresident alien spouse to be treated as a U.S. resident for tax purposes alone and filing MFJ;
- Taking advantage of foreign tax credits and deductions, as applicable; and
- Taking advantage of the Foreign Earned Income Exclusion and, if eligible, the Housing Exclusion and Deduction.
As mentioned above, applying strategy #2 will help those who paying foreign taxes. It’s straightforward. The combination of strategies #1 & #3, however, are more powerful if you are eligible to employ them.
NB: If you employ strategies #2 & #3, you cannot claim foreign tax credit (strategy #2) for foreign taxes paid on income that you exclude via the Foreign Earned Income Exclusion (strategy #3). To do so would be to receive a double benefit on the same income. Foreign earned income excluded from U.S. taxation is not included in the calculations to determine foreign tax credits.
Stated simply, the benefits of strategy #1 come from increased personal exemption amounts available to joint filers to help reduce taxable income, and the lower tax rates afforded MFJ status filers, compared to rates imposed on other status filers. Lower taxable income plus lower tax rate equals lower tax liability — a “no brainer”!
The benefits of strategy #3 come from excluding up to a prescribed amount of foreign earned income for each eligible taxpayer from your joint taxable income. If your “nonresident alien but elected U.S. resident for tax purposes alone” spouse’s substantial income is equal to or less than the exclusion limit ($91,400 for tax year 2009), then it is totally excluded from taxable income. If income exceeds the limit, then the excluded amount is equal to the exclusion limit.
Of course, the IRS doesn’t much like exclusions and credits and deductions, and therefore sets up “flaming hoops” that a taxpayer needs to jump through in order to obtain benefits. “Flaming hoops” include additional forms, eligibility tests, bookkeeping and recordkeeping requirements and the like. Just like real flaming hoops, they look a lot worse than they really are and navigating them is much easier than imagined.
Strategy #3 is an article in itself. There’s a lot of information available about those flaming hoops, as well as how to clear them safely. Perhaps we’ll cover these items in another article.
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SUMMARY
So there you have it. Quite a long article again, but the info is well worth it if it saves you money at tax time. Selecting the proper filing status, making the proper elections, and employing tax credits and other strategies that best benefit you, the taxpayer, is the only way to legally lower your tax bill. In these times of economic stress and woe, who couldn’t use a few extra bucks after paying the taxman?
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IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
That was a good nap – just kidding 8-D
Not sure how others feel, but I hate thinking about taxes. On the other hand, it’s unavoidable and you manage to synthesize valuable information into layman’s terms. I think similar articles are relevant to all of us living here.
My vote = keeper
Hi Gary – Thanks for the vote of confidence! I’ve a few more articles in the works. I hope I can still turn the “tax-geek talk” of the more involved topics into layman’s terms. One tends to get locked into “tax-geek” mode every now and then while working with this stuff!
😆
My wife is a non-U.S. citizen, and we file jointly as I procured a TIN Number (Taxpayer Identification Number) for her, from the U.S. Embassy years ago.
Hi Paul – Sounds like you’ve “done your homework”!
Many taxpayers know that filing jointly results in additional exemptions and, possibly, additional deductions. Often, the lower tax rates that joint filers enjoy (over the rates of other filers) goes unnoticed.
Now, if I could only find a legal precedent for deducting beer depletion. 😉
A “Catch 22”
A man may be dependent on his beer, yet the beer may not a dependant of the man??? It just doesn’t seem right.
I was thinking more along the lines of accounting for natural resources. Just like an oil deposit, pumping the oil out causes depletion of the asset. I see a case of SMB as the “deposit” and man as pumping it dry, one bottle at a time.
As I said, all I need to do is find (or cause) a legal precedent, and life in the Philippines becomes much sweeter.
😆
….good info but what I’m really interested in is how do I avoid paying any taxes???? I love my Country but I’m tired of paying to have it run into the ground.
Hi Brian – Interesting comment! Plenty of issues in very few words.
Let’s see – tax avoidance vs. tax evasion: avoidance is legal, evasion is illegal. Tax avoidance almost always means paying those taxes, just not right now. Deferring tax using legal tax strategies is at the core of tax avoidance. Tax evasion, on the other hand, means not paying those taxes at all, not now, not ever. There are no “legal” tax strategies that involve tax evasion.
I cannot stress enough that tax evasion is illegal. (Sorry to put the damper on anyone’s plans or bright ideas.)
Payment (or non-payment) of taxes won’t change the way the Country is being run. That’s a ballot box issue.
There are some who think that their vote doesn’t count, or that one vote more or less doesn’t have the power to change “what’s wrong.” Those folks need to learn of the “vote effect multiplier” called “Getting Involved,” and to learn how to employ this “strategy” between trips to the ballot box. Complacency facilitates status quo (Latin for “more of the same, old #@%*”).
I like the Idea of cutting off the food/money supply to congress hehe… Kind of like starving it into submission….I can dream can’t I?
Hi Hudson – As long as we dream those dreams in our beds at home alone, we won’t have to worry about dreaming other dreams of freedom in our cots in prison with others! 😉
But, it does sound nice! 😆
Hi Paul: An interesting side note is that dependants of a U.S. citizen living in the Philippines, and are Philippine citizens are not allowed as dependants, and cannot receive a TIN even if all
other IRS requirements are met. However if your dependants live in Mexico, or Canada a TIN is allowed. A little discriminatory allowing our historical relation with P.I. This may be a new IRS policy to squeeze taxes.
Hi Roberto – Yes, those of us living outside of the USA, Canada and Mexico have additional “test elements” to pass before someone other than a spouse may be claimed as a dependent for income tax purposes. As you point out, the “rule” says:
“You cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico.”
U.S. citizen = self-explanatory.
U.S. resident = green card holder or alien who meets “substantial presence” requirements.
U.S. national = a non-citizen who owes allegiance to the U.S. (e.g.; American Samoans and Northern Mariana Islanders).
Resident of Canada or Mexico = self-explanatory.
This “rule,” which has been around for a number of years, appears to prohibit Philippine citizens (or citizens of other countries) living outside of the U.S., Canada and Mexico from being claimed as dependents. It was instituted during the years prior to the requirement for all dependents being claimed to have Social Security numbers (pre-ITIN days) as a method of preventing fraudulent claims of dependents.
There is an EXCEPTION to the rule. If you are a U.S. citizen or U.S. national who has legally adopted a child (who doesn’t meet the citizen/resident test), you may claim the child as a dependent so long as the child lived with you as a member of your household all year.
This EXCEPTION also applies if the child was lawfully placed with you for legal adoption.
Sometimes, taxpayers may not realize that the IRS, for income tax purposes, considers children as usually being citizens or residents of the country of their parents. If a U.S. taxpayer is a U.S. citizen when the child is born, the child may be a U.S. citizen even if the other parent is a nonresident alien and the child was born in a foreign country. If this is your situation, the citizen/resident test (for dependency) is met by the child. Note: the other parent isn’t required to be your spouse. The child, however, must meet other tests before being considered eligible to be claimed as a dependent.
This explains why the IRS rejected the application for a TIN. But this was while the green card was pending. now that we have the green card, and a SSN I will send in that info hoping to stop the new increase they (IRS) is proposing
Hi Hudson – Yes, there are hundreds of flaming hoops that the IRS has available. They set them up; taxpayers jump through them. Like flaming hoops, however, these things often look a lot more frightening than they really are. Unfortunately, the IRS has a solid, valid reasons for each hoop – usually connected with combating a particular facet of fraud.
Remember that the easiest way through this situation’s hoops is with the “Married Filing Jointly (MFJ)” filing status. (For some of those hoops, MFJ is required.) 😉
hello Paul
i would like to ask about my situation.. i was born to a filipina mother and american father, my dad work on my papers and citizenship. it was granted to me last 2004 together with my Us Passport. i have never left the Philippines until now. im already 25 and palnning on going to the states.. is there any tax that i need to pay? and if so, how much would it be ?
Hi Michael – I can’t give you a complete answer without more information, but I can give you a general reply.
While living in the Philippines before you were granted U.S. citizenship, you were not a “U.S. taxpayer.” For U.S. income tax purposes, you were a “Nonresident Alien” during that time. When you were granted U.S. citizenship, your status changed to “U.S. Taxpayer.”
The only tax that a “Nonresident Alien” may have to pay would be income tax on income received from a U.S. source (like a U.S. employer, U.S. customer, U.S. bank account, U.S. investment, etc.). If you did not receive any income from any source in the U.S., you would not be taxed and would not have to file a U.S. income tax return.
U.S. Taxpayers have to pay income tax on all income from any source worldwide and file U.S. income tax returns IF the total income exceeds a specific dollar amount assigned to each specific “filing status.”
For an unmarried 25 year old, that specific dollar amount is $9,350 of income received during 2009. At an exchange rate of PhP 46 : USD 1, that would be PhP 430,100.
Please note that any money received from a relative in the U.S. (maybe an OFW relative or other U.S. residents) is not considered as taxable income. That money is considered a gift for U.S. income tax purposes. (Gift givers are responsible for paying “gift taxes.”)
Hope that helps. If we need to go deeper, send me a note via the “contact us” button at the top of the page or this link: http://liveinthephilippines.com/contact-us-2/
Hi Paul,
Very informative content you have here. Maybe you can help me with my situation. You see, I just got my green card this year (Jan 2010) and I applied for F2A application for my wife and kids so we can live together in US. However, I got a work offer in Manila (temporary consultation job) for 1 year so I applied for a re-entry permit. I also understand that in order for any LPR to maintain their status, they have to file their annual income tax.
Now while I was in Manila, I received a I-864 form from NVC regarding affidavit of support. There is a question regarding sponsor’s income and employment. So I selected the Employed check box and typed my current employer and my current annual income. Please note that I only started working again this Jul 2010 as a LPR.
The next question in the same form is about Federal income tax return information. My questions are:
1. How do I answer this question since I only started working as a green card holder last Jul 2010?
2. What is the procedure on paying US Federal income tax while I am in Philippines? Where can I file the same?
Hi Garry – For privacy reasons, I’ll answer your questions via a private email. I must admit, your story is quite interesting. Please be assured that your questions have answers and that any resulting procedures you have to follow will not be difficult.
Keep an eye open for email! 😉