Do I Report the Income of a Foreign Spouse on a US Tax Return?

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Do I Report the Income of a Foreign Spouse on a US Tax Return?

Do I Report the Income of a Foreign Spouse on a US Tax Return?

Foreign Spouses and US Taxes

When a US person moves overseas to live as an expat, they are still subject to US tax on their worldwide income as well as having to disclose their international accounts, assets, and investments on a host of various international reporting forms such as the FBAR and Form 8938 (FATCA). When an Expat marries a foreign spouse, Non-Resident Alien (NRA) whether the non-resident foreign spouse has to report their US income is determined in part based on whether or not the expat is filing taxes as Married Filing Jointly or Married Filing Separately. In addition, the FBAR and Form 8938 requirements are also a bit convoluted for NRAs. Let’s take a brief look at foreign spouses of US Expats and US tax filing requirements.

Married Filing Separately (MFS)

What an Expat files married filing separately, there is not much concern about the NRA’s income or reporting. That is because when an Expat file separately instead of jointly, they only have to include their own income and not their foreign spouse’s income. The problem can arise when it is a dually-owned asset in a foreign country, in which the foreign country may treat the income differently than it is treated in the United States — but from a baseline perspective, only the filer’s income information is required.

Married Filing Jointly (MFJ)

When a person files Married Filing Jointly, both taxpayers’ income is required to be included on the return. Taxpayers are supposed to make an election to allow a non-resident alien to file along with a US person, but oftentimes the election is not made and it does not tend to be fatal. Something to keep in mind is that with a jointly filed return filed with a non-resident alien spouse, the non-resident alien may have to disclose assets to the US Government that they would prefer to not disclose, so that is something to keep in mind before filing MFJ.

Travel to the US and Substantial Presence Test

While the United States does not have the authority to tax nonresident aliens on their worldwide income, depending on how often the nonresident alien travels to the United states, they may become subject to global income tax if they meet the Substantial Presence Test (SPT). Taxpayers who meet SPT are required to report their worldwide income and disclose their global assets. There are ways to plan around meaning the Substantial Presence Test and even if they do, they may qualify for an exception such as the Closer Connection Exception.

Form 8938 (FATCA)

Went a US Expat files a joint US tax return and includes their foreign spouse, then they may be required to file FATCA Form 8938.  Form 8938 is used to disclose foreign financial assets to the US government when certain threshold requirements are met. In addition, the form requires information regarding the different categories of income generated from the foreign assets — and this may also be informed that the non-resident alien does not want to provide to the US government and something to consider before filing jointly with a Non-Resident Alien.

FBAR

The FBAR is used to report foreign bank and financial accounts. Foreign reporting includes more than just bank accounts — it also certain types of overseas life insurance, mutual funds and other pooled funds, and even foreign pension plans. Even if a US person resides overseas as an Expat they are still required to file the FBAR. Conversely, even if a non-resident alien files married filing jointly with a US expat, that does not typically make them a US person for FBAR filing purposes, but the rules are subject to change and some exceptions may apply.

Expatriate vs Expat

It is important to note the key distinction between these two terms. An expat is a US person who remains a US person but resides overseas. An expat is still required to file US tax returns and report their global assets and accounts. When a person formally gives up their US status that is referred to as expatriation and it is not as simple as just moving overseas or allowing a green card to expire. There are various steps the taxpayer must take in order to expatriate — and they should try to be cautious to see if they can plan around being a covered expatriate.

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 that 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 of the Streamlined Procedures. 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. 

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.