I am planning to file married filing jointly. We married last year in Oct 2021, and my wife is a resident of Canada. She does not work in the USA nor has ever been to the USA. It's recommended we file married filing jointly for the USA Tax return, due to immigration reasons. I make about $150,000 a year, she makes about $48,000 USD equivalent. Is her income excludable per the IRS tax treaty? She is a Canadian PR and an Indian Citizen.
She has never been in the USA, her tax home is Canada, so per Form 2555 she should meet the requirement to be able to exclude her income? I am saying it will be added, but will also be excluded, so the net effect on our tax return would be 0. She does of course pay Canadian Income tax. Seems two options, to exclude her income using Form 2555 or to take foreign tax credit using form 1116. Anyone have expertise?
It does state on, https://www.irs.gov/individuals/international-taxpayers/nonresident-spouse
"Generally, neither you nor your spouse can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice is in effect. However, the exception to the saving clause of a tax treaty might allow a tax treaty benefit on certain specified income."
@superduper , you present somewhat of a complicated issue here. But to be sure that I understand the situation, below is what I understand from your post:
(a) you , a US person ( citizen / Green Card ) living and working in Canada OR you a US person ( citizen/ Green Card/ Resident for Tax purposes ) living and working in the USA ;
(b) Spouse a NRA ( not residing in the USA, NO SSN / ITIN, citizen of India, PR of Canada .
(c) Wish to file as MFJ ( Married Filing Jointly);
Now the question is how to (1) exclude spouse's income ; OR (2) assert treaty privileges OR (3) take foreign tax credit against US taxes.
Because the spouse is a Non-US person , there is no requirement for her to file a US return-- marriage to a US person does not affect her Non-Resident Alien status and with no US sourced income, this position is even more secure. If on the other hand she wishes to be taxed as a US resident ( for tax purposes or otherwise ), her world income comes under the purview of US taxes.
To be a resident for tax purposes ( and thus be bale to file jointly with a US person spouse), one needs to meet the Green Card test or Substantial Presence Test or be eligible to request to be treated as a resident for Tax purposes if and only if one meets a number of conditions including be present on US soil.--:
Resident alien.
A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year.
Green card test. You are a U.S. resident if you were a lawful permanent resident of the United States at any time during the calendar year. This is known as the green card test because resident aliens hold immigrant visas (also known as green cards).
Substantial presence test. You are considered a U.S. resident if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
31 days during the current calendar year; and
A total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year.
If you do not meet either the green card test or the substantial presence test for the current year (for example, 2020) or the prior year (2019), and you did not choose to be treated as a U.S. resident for part of the prior year (2019), but you meet the substantial presence test in the following year (2021), you can choose to be treated as a U.S. resident for part of the current year (2020) and be taxed as a dual-status alien for the current year (2020). To make this first-year choice, you must:
When counting the days of presence in (1) and (2) above, do not include the days you were present in the U.S. as an exempt individual.
If you make the first-year choice, your residency starting date for the current year (2020) is the first day of the earliest 31-day period (described in (1) above) that you use to qualify for the choice. You are then treated as a U.S. resident for the rest of the year.
If you are present for more than one 31-day period and you satisfy condition (2) above for each of those periods, your residency starting date is the first day of the first 31-day period. If you are present for more than one 31-day period but you satisfy condition (2) above only for a later 31-day period, your residency starting date is the first day of that later 31-day period.
As you can see from the above quotes, there is very basic and foremost requirement to be present in the USA before one can take advantage of being a "resident for tax purposes" and the all the other eligibility that follow therefrom.
Bottom line of all this is that you cannot file as Married Filing Jointly, till your spouse has actually lived in the USA for at least 31 continuous days.
Without knowing more about your own status ( citizen / Green Card / Resident for Tax purposes ); tax home, and country of citizenship ( if not US citizen ); it is very difficult to answer these questions with any certainty ( in some cases treaty conditions may affect the path ).
Is there more I can do for you ?
pk
(a) US person ( citizen/ Resident for Tax purposes ) living and working in the USA
In regards to your question about resideence, please see below, they clearly state non-resident spouse can be treated as resident for tax purposes
https://www.irs.gov/individuals/international-taxpayers/nonresident-spouse
"If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a U.S. resident within the meaning of Internal Revenue Code (IRC) section 7701(b)(1)(A) and the other is not, you can choose to treat the nonresident spouse as a U.S. resident for tax purposes. This includes situations in which one of you was not a U.S. resident at the beginning of the tax year but was at the end of the year, and the other was not a U.S. resident at the end of the year."
@superduper , would humbly suggest that you read through the 26USC section 7701, espcecially sub. sections 2(B)(i), 2(B)(ii) and 2(C). None of these sections clearly state that a spouse whom has never been legally admitted to the US is ineligible for exercising the first year option but in between the lines it is pretty clear this is what is implied. So I am sorry to say that I hold my position. Of course I am fully aware that you will indeed proceed with your understanding of the law ( because it is indeed beneficial to you ). Perhaps you would consider consulting a tax professional familiar with international and non-resident taxation.
regards,
Namaste
pk
pk, leaving the question aside of treating as a US resident for tax purposes. As there are many past posts on this.
What's your interpretation on foreign exclusion vs. foreign credit:
I live in the USA, with USA Income. My spouse has never been to USA and is not a US resident, she has Canadian income. But we will be filing joint return per https://www.irs.gov/individuals/international-taxpayers/nonresident-spouse.
Per the IRS non-resident spouse election, it does state, "Generally, neither you nor your spouse can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice is in effect. However, the exception to the saving clause of a tax treaty might allow a tax treaty benefit on certain specified income."
Can we claim a credit against the tax that she paid, using form 1116?
Or should we be doing an exclusion per form 2555?
It seems from the instructions on form 2555, they do have lots of mentions for non-resident spouse and possibly easier application?
I do get a better tax treatment using form 1116, so asking.
@superduper thank you for your post.
1. Foreign Earned Income Exclusion ( form 2555 ) has the advantage of excluding the whole of foreign income ( including housing costs/ cost of living differentials etc. where applicable ) upto a maximum amount. The issue with this choice is that the tax computations is based on marginal rate ( highre rate ) that is without regards to exclusion and the subtraction of the tax due to the excluded is based on a much lower rate -- thus ( i think ) unfairly penalizing the taxpayer. It should have been based on ratio of foreign income to world income as is done for everything associated with foreign incomes.
2. Foreign Tax credit ( form 1116 ) has the advantage of recognizing the total taxes paid to a foreign administration ( without regard to tax home or duration requirements etc. ). But then it limits the allowable portion for the current tax year (using a ratio of foreign income ( that is taxed by both USA and the foreign admin. ) . Thus if you have a large US income and lower foreign income then the benefit for the current year is ratio-metrically reduced. Of course you are allowed to carry back or forward the unused credit but usage of it again requires foreign earned income. Thus the benefit may be asymptotic.
3. Give the above, the choice of which path to take should be based on actual computations and choose the best path for your case. It is a case of choosing the lesser of two evils keeping in mind your future plans.
Hope this helps. I am not copping out but this is my take on this subject ( and I have done a lot foreign tax issues both as a professional and as an expat myself back in the eighties and nineties.
Coming back to the other issue you mentioned -- I am troubled and only because of your situation -- your tax home in USA and spouse in a foreign land claiming resident status ( for tax purposes at least). If you look at the all examples that IRS provides they are mostly of NRA spouse and US person ( citizen/Green Card ) staying in the same tax home ( foreign or US ). In this case it is easy to argue that the tax home is basically a US territory for tax purposes ( they don't say that but behaves as such ) -- thus an NRA spouse is not different whether he/she is staying in the USA or abroad -- it is tax home that matters.
On the other your situation is different ---the spouse , NRA, is living at a tax home abroad and thus the question becomes as issue of residency -- does the USA have right to tax an NRA, having a tax home in a foreign land and the income is not connected to USA ? I know that this issue is indeed covered in case of US-India tax treaty where one spouse is a tax resident in the USA and provides financial support for a NRA spouse back in India ( whom has never come to the USA ) -- and in this case the US tax resident is allowed to have dual & simultaneous tax home i.e. claim dependency or joint filing for the NRA spouse. At this point i do not know of a tax court case either covering your particular case. I sympathize with the situation. Note however, that even if your path escapes IRS scrutiny, absent any clear IRS position, I would consider it to be luck rather than a precedent. I would love to follow your case though.
regards,
pk
Thanks pk for your wisdom and great answer.
A separate question:
In this link: https://www.irs.gov/individuals/international-taxpayers/claiming-tax-treaty-benefits
If a nonresident alien individual has made an election with his or her U.S. citizen or resident spouse to be treated as a U.S. resident for income tax purposes, the nonresident alien may not claim to be a foreign resident to obtain the benefits of a reduced rate of, or exemption from, U.S. income tax under an income tax treaty. However, the exceptions to the saving clause in some treaties allow a resident of the United States to claim a tax treaty exemption on U.S. source income.
Does this basically state, that we can't use form 1116 because of using benefits of the income tax treaty? Or are they referring to other income tax treaties that is not part of form 1116?
@superduper , sorry I forgot to comment on this treaty benefits assertion. Neither Foreign Earned Income exclusion nor foreign tax credit are treaty related i.e. these are available to all US taxpayers irrespective of whether their tax home is in a treaty country or not. Social Security and adjustment thereof however is covered by a separate treaty -- totalization agreement between SSA and the foreign SSA Equivalent.
What the referred quote is talking about specific treaty benefits that are available to residents of each party to the treaty -- for example Chinese students ( students whom are resident of Chine temporarily living in the USA (for the sole purpose of studying or training ) can exclude the first US$5000 of their earnings from USA taxes ( federal ).
Hope this helps.
pk
Thanks pk, that helps. I think we will go the foreign tax credit route then, form 1116, since it's more benefial, reducing total liability.
In regards to our previous discussion on treating my wife as a US resident. I do agree, i don't find explicit examples for our case. But there is no guidance listed out to exclude. She's a non-resident clearly, and guidance says, as a spouse to US citizen, she can be treated as a resident for tax purposes... And numerous sites and posts do indicate that filing jointly under that provision is acceptable, for people with foreign spouses. I have also seen examples from other individuals on other immigration sites (anecdotal evidence). I have also seen references that "Residence" and "Tax Home" can be different. Instructions to form 2555, even show this detailing this out. Her residence would be US according to the statement we would file, but her tax home, as that is where is works is Canada. I appreciate your answer, but it seems there is no clear direction from IRS on this. I lean towards this is allowed, as the wording matches our description and situation.
I'm sure there is 100,000 or more taxpayer in the same situation. The reason we are, is that we are awaiting for immigration proceeding to provide green card for wife, there are close 100,000+ or much more in same boat. I
Thanks pK for being so helpful. Thank you.
One more question.
Since we are in California. There is state tax consideration.
How does foreign exclusion 2555 vs foreign tax credit impact state taxes?
If we exclude the income, i think there is no increase state tax liability. so this makes form 2555 more favorable here.
But if we instead include income and use foreign tax credit. The federal taxes are lower due to the tax credit, but the state taxes are higher? As i think California has no provision for tax credit.
@superduper , you are correct in that it is quite likely that your case is not unique -- especially where CA or MX are concerned.
If you use income exclusion at the federal level then CA starts with Federal AGI and adjusts for California specifics, it is quite clean since the excluded income never enters the computation.
For the foreign tax credit scenario, it is a bit more involved. You still start with federal AGI and then allocate your incomes as CA sourced or sourced to another state ( in your case another country ). Should get you to the same situation. California generally taxes only in-state sourced income whether you are a resident or not . This is what I remember of California taxes. Most states treat out-of state income pretty similarly where there is no treaty between the states.
Hope this helps
pk