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.
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.
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.
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.
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.
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?
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.