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Non-Resident Alien Spouse and Joint U.S. Tax Return

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This article will cover the options that are available for married couples where one spouse is a non-resident alien and the other is a U.S. citizen. A nonresident alien is an alien who has not passed the green card test or the “substantial presence test” under IRS rules. For the purposes of this article, a “married couple” will refer solely to this specific situation.

Election to File Joint Return

Although a non-resident alien who does not have U.S. source income is generally not required to file a U.S. tax return, in some instances it may be beneficial for a non-resident alien married to a U.S. citizen to do so. If the married couple meets certain criteria, they may elect to file a joint return.

The criteria is as follows: A married couple may elect to treat the non-resident alien as a U.S. resident, if the couple is married at the end of the taxable year. This also includes instances in which one of the spouses is a non-resident alien at the beginning of the year, but becomes a resident alien at the end of the year, and the other spouse is a non-resident alien at the end of the year.

Reason for Electing to File a Joint Return

There are numerous reasons why a non-resident alien in a married couple may elect to file a joint return. For instance, the non-resident alien may have U.S. source income, in which case U.S. taxes will likely be owed in any event. Thus, filing a joint return may result in less taxes paid, depending on tax brackets, type of income and applicable deductions.

It may also make sense in certain circumstances for a non-resident alien who does not have U.S. source income to file a joint return. Additionally, a non-resident alien filing a joint return may be allowed to claim possible credits on foreign income taxes paid, such as the Foreign Tax Credit.

Note however, in certain circumstances, the non-resident alien spouse of the married couple filing the joint return may still be treated as a non-resident alien (such as for the tax purposes of IRC Chapter 3 Withholding, Social Security, or Medicare).

Applicable Rules

Married couples must file a joint return in the year they first elect to treat the non-resident alien as a resident alien for tax purposes. Both spouses will be considered to be residents for tax purposes for all years that the election is in effect. While a joint income return must be filed for the year the election is made, a joint or separate return may be filed in later years.

By electing to file the joint return, both spouses must report all worldwide income on the return. In general, neither spouse will be able to claim tax treaty benefits as a resident of a foreign country in the years in which the election is made, although this will depend upon the specifics of each treaty.

Making The Election

Married couples may make the election by attaching a statement, signed by both spouses, to the joint return for the first tax year that the election is made. (See specific IRS requirements for more details). Married couples may also make the election by filing a amended Form 1040X joint tax return (however, any tax returns filed after the tax year of the amended return must also be amended).

Ending or Suspending the Election

Once the election is made, it will apply to all subsequent tax years, unless it is ended or suspended. An election may be ended by various means, such as the death of either spouse, legal separation, revocation by either spouse, or inadequate records (See Publication 519, U.S. Tax Guide for Aliens, for more details). Once the election is ended, neither spouse may make the election in subsequent tax years.

An election is suspended if neither spouse is a US citizen or resident alien at any time during a later tax year. Married couples may resume the election however if the required criteria are eventually met again in subsequent tax years.

Contact Sherayzen Law Office

This article is intended to give you a brief summary of these issues. If you have further questions regarding these matters as it pertains to your own tax circumstances, Sherayzen Law Office offers professional advice in all of your tax and international tax needs. Call now at (952) 500-8159 to discuss your tax situation with an experienced international tax attorney.

Sourcing of Income

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The sourcing of income has very important tax consequences for U.S. and foreign taxpayers.  The IRS taxes U.S. taxpayers on all income, from any source derived; however, U.S. taxpayers will be relieved of double taxation and may utilize the foreign tax credit in many circumstances involving non-purely domestic taxation. Foreign taxpayers, on the other hand, will usually only pay U.S. taxes on income sourced in the U.S. Thus, the source of income rules are critical to determining where a taxpayer will pay applicable taxes. This article will examine both income sourced inside the U.S. and foreign-source income.

Income Source Determination

In order to determine the sourcing of income, income realized is first placed into certain categories (such as interest, dividends, rent, sale of property, etc.). At times, an item of income may overlap into more than one possible category, in which case, specific IRS rules will likely clarify the proper classification. Once income is categorized, income source rules will then be applied in order to ascertain whether the income is U.S. or foreign-source. As a rule of thumb, income will be either U.S. or foreign-source depending upon where property is located, or where the income was realized, however there are many exceptions to this principle.

Income Source Examples

In this section, common income categories such as dividends, interest, personal services income, rents and royalties, and sales or exchanges of property, and their income sourcing rules will be briefly explained (other common income source rules not detailed here apply to software income, and transportation and communications income).

Dividends

Generally speaking, dividends received from U.S. (domestic) corporations are considered to be U.S.-source income. The fact that a domestic corporation may be distributing dividends derived from overseas operations usually will not matter for these purposes.

Conversely, dividends paid by a foreign corporation will generally be deemed foreign-source income. An important exception to this rule occurs in situations where a foreign corporation earns 25% or more of its gross income from income effectively connected with a U.S. trade or business for the three years immediately preceding the year of the dividend payment. In this case, that percentage of the dividend will be treated as U.S.-source income.

Interest

Interest income received from domestic corporations, the U.S. government and state governments, and non-corporate U.S. residents (among others) are deemed U.S.-source income.
There are some exceptions to this rule. For example, income will is deemed to be foreign-source if interest is received from a U.S. corporation which, over the prior three-year period, earned 80% or more of its active business income from foreign sources.

Personal services income

Personal services income includes such items as salaries, wages, fees, commissions. The location of where the services are performed will usually determine whether the personal services income is U.S. or foreign-source.

There are some exceptions to this general rule, including a limited commercial traveler exception for short business trips and de minimus amounts.

Rents and Royalties

For income received from the use of tangible property, the location of the property will determine its income sourcing. Other factors, such as where the property was manufactured, are not considered.

For income received for the use of intangible property (e.g. patents, copyrights, goodwill, etc.), in general, the location of where the property was used will determine its income sourcing.

Sale or Exchange of property

In general, the source of income relating to disposition of real property will depend upon the location of the property.

Broadly speaking, the sale of personal property (i.e, stocks, securities, equipment, inventory, intangible assets) will depend upon the residence of the seller. However, there are various exceptions to this rule. For example, if a item of purchased inventory is sold, the location of the sale will determine its income source.

Tax Treaty versus Regular Sourcing of Income Rules

Under certain circumstances, the sourcing source of an item of income or deduction could be changed by the provisions of a treaty. However, taxpayers claiming this benefit will need to file their tax return along with Form 8833.

Contact Sherayzen Law Office

This is a general overview of the taxation rules relating to sourcing of income. There are many other complex issues that may apply, depending upon the circumstances. Do you have questions concerning taxes relating to your international transactions or income? Sherayzen Law Office can assist you with these matters. Call (952) 500-8159 to set up a consultation today.