MFS vs MSJ for non-resident

[MJ23Bulls]

Hi,

I'm a US citizen in Illinois and my spouse moved here in November 2024 (when we got married). He has a SSN, but no green card (yet) and no income in the US in 2024. He does not pass the substantial presence test.

My understanding is that we can file jointly or separately.

If Filing Jointly

We can claim that my spouse is a "tax resident" for all of 2024.

Question 1: My spouse's income in Germany was well above the maximum amount that can be excluded. Am I right to still fill out "Foreign Earned Income and Exclusion" but instead of asking for an exclusion go for the foreign tax credit?

Question 2: For the tax credit I choose credit over deduction. I choose "First year I am eligible for the election" for Simplified Limitation Election Eligibility and elect simplified calculation. Then, for the general income category I add the wage (even though I already added it to "Foreign Earned Income and Exclusion" - I tried not adding it but then my Federal Due increased by a lot). I leave everything empty, except for "Foreign Taxes Paid - Germany" where I choose "No, I have foreign taxes paid on rental, royalty, or other income (including wages)" and add the taxes paid in Germany. After all of that I have a federal due of almost $3k. Now my question: the average income tax was about 36% in Germany and I am surprised that we have to pay something in the US since I read everywhere that filling jointly will be beneficial. What did I do wrong or what am I missing?

If Filing Separately

If filing jointly is indeed not beneficial, filing separately might be better.

Question 3: Since my spouse has no green card, doesn't pass the substantial presence test and didn't have any income in the US, does he have to file at all? Is it advisable to file at least a 1040-NR with $0?

[SusanY1 · Accepted solution]

It sounds like you went through the steps properly to get the tax credit for your spouse's income when testing to see if filing jointly would benefit you. 

You could potentially combine the exclusion and foreign tax credit to see if that provides a better result., but it sounds like your best case this year may be to file separately.  

Since your spouse wouldn't meet the substantial presence test and wouldn't have any US-sourced income this year, your spouse would have no return filing obligation or tax due at all. 

Normally, filing jointly is beneficial when compared to filing separately - but this is really only true when comparing two spouses with a US filing obligation.   Your situation is a bit unique, and may be the exception to that rule. 

If you have an eligible dependent (which cannot be your nonresident alien spouse), you can file Head of Household for 2024 since your spouse didn't meet the substantial presence test.  

If you would like to try to use both the Foreign Earned Income Exclusion and the Foreign Tax Credit, you will need to manually determine the "reduction in foreign taxes"  to exclude the portion of the tax paid that is attributed to foreign income.    

If you want to try the combination method the reduction is handled by dividing the amount of foreign exclusion taken by the total foreign income.  This gives you the percentage of the foreign tax to reduce.  

For example if you take the full exclusion of 126,500 on 150,000 of income where 50,000 of tax was paid it would look like this:

126,500/150,000= .843333
.843333*50,000=42,167
 

You'd then enter a "reduction in foreign taxes" amount of 42,167 so the maximum foreign tax considered for the credit would be $7,833 (this same number is not necessarily what the credit will work out to be.) 

[MJ23Bulls]

Thank you so much!