Foreign Spouse has SSN but living Abroad

[gur1]

My wife was in the USA from 2014 to mid 2021, and we filed a joint tax return for those years. She moved to Canada in mid 2021.  I am a resident alien (on a non-immigrant visa). She has a SSN and has  non-immigrant visa. She is residing in CANADA and Occasionally travels to the USA. Can I still file my  tax return as married filing jointly and declare her CANADA income in my USA tax return or I need to select to file as married filing separately?

[Anonymous_]

@pk ?

[pk]

@ gur1, generally speaking, even if your spouse has moved to another country for US tax purposes you can still file jointly as long as you expose her world earnings to US taxes . In such a case depending on the exact facts and circumstances, her foreign income could be eligible for exclusion from US taxes ( up to a max set each year --- foreign earned income exclusion ). Please tell me more --- your citizenship, her citizenship; does she work in Canada for a local entity or remotely for a US entity or for US govt; what work visa do you have and she had ; is her US visa terminated; do you own home here in the USA etc. etc. I will circle back once I hear from you pk

[gur1]

@pk 

Apologies for the late response. Please share your thoughts

Both my spouse and I are Indian citizens. She works in CANADA for  Canadian entity.

I am on H1b. My wife has USA visa (H4). We have a rental house in the USA.

She did not pass the substantial presence test in 2022 but passed the substantial  presence test in 2021,2019 and 2018

Given these details. Can tax file as Married Filing jointly in 2022? Also will we be able to use  tax treaty and not get double tax even though when we are treating my spouse Nonresident as a resident? I read somewhere then when nonresident is treated as resident then tax treaty cant be used

[DaveF1006]

Yes, you may file married filing jointly under the conditions I will outline below. First though, let me answer your latter question. Your wife would not be able to apply the US/Canada tax treaty unless she is considered a Canadian resident since she is not considered a US resident any longer. Please read this Turbo Tax post for further information. Meanwhile here is how to report in your return.

Treat your spouse as a resident alien for tax purposes.   If you do this, you will need to include your spouse's worldwide income in your US tax return and it will be subject to US taxes.  

To do this follow these steps.

   1. Attach a statement to your tax return, signed by both spouses, that states that one spouse is a nonresident alien and the other is a U.S. citizen or resident alien, and you are choosing to both be treated as US residents for the tax year.

   2. List the name, address and Social Security number (or Individual Taxpayer Identification number) of each spouse.  

   3. For the first year you make the choice, you have to file a joint return. In later years you can file joint or separate returns. Married Filing Jointly will give you a higher standard deduction and has other benefits that are not available using a married filing separately status, but you do have to include your spouse’s worldwide income in joint income.

@gur1 

[gur1]

Thanks, @DaveF1006 

She is working in CANADA on a work permit and is not a permanent resident. She files taxes in CANADA as a resident. Given this information when filing USA taxes if we file join tax and consider  her as a resident alien  because  I am resident 

Which below option is applicable? I am confused as the IRS website(https://www.irs.gov/individuals/international-taxpayers/nonresident-spouse) says "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"

Option 1 

 Does she get a tax credit for taxes paid in CANADA based on the tax treaty? 

Option 2 

 She can't get a tax credit and she has to pay tax again on CANADIAN  income  while filing USA tax

If Option 2 is applicable then will it make more sense that  I  file married filing separately as resident Alien and for my wife file federal tax as non resident Ailein to report income of around $200 on bank interest rate?

[pk]

@gur1 , having gone through the whole conversation ( to refresh my memory) and agreeing with @DaveF1006  on the situation and feasibility and method of filing a joint return, I first want to clear up my understanding of the situation/ scenario and add some thoughts.

1. Both spouses  ( H-1 and H4 ) lived in the USA as  residents for tax purposes from 2014 through 2021 August. Thereafter  H1 spouse continued to live and earn in the USA while the H-4 spouse moved to Canada on work visa.

2. H-4 spouse lives , works in Canad and visits US time to time ( not long enough to maintain Resident for Tax purposes status.

3. Now the question is how to minimize 2022 Taxes  ( file as MFJ or MFS or ? ) and how to recognize interest income from US bank ( held in joint name ? )  H-4 spouse has tax id ( SSN )

Assuming the above to be a generally accurate picture  AND that there are no dependents involved ( no eligibility  to use Head of Household  filing status ), below are my thoughts

(a) MFJ filing status  requires the H-4 spouse's foreign earned income to be subject to (/ recognized for)  US taxes , at  both federal and state level and the double tax burden ameliorated  ( generally only at federal level) by :

                  1. by itemized deduction  as part of the State & Local Taxes , but note that this is limited to $10,000 per return   OR

                  2.  Foreign Earned Income exclusion -- the limitation here are  (A) to meet the Physical Presence Test ( 330 days at foreign tax home(s) in any continuous 12 month test period where the tax year is nestled in;  (B) Tax home abroad ;  (C) allocation of the yearly maximum exclusion to the actual days present  in foreign  tax home; (D) tax rate is modulated by total income, including excluded income;  (E) once chosen, this method remains valid for a period ; (E) generally because this modifies the AGI, the State benefit of the exclusion is ly automatic; OR

                  3. Foreign Tax Credit --- here the limitations are  (A) while the total credit is recognized US$ for US$, the allowable credit per year is based on a ratio of Total Foreign  income to World income of the tax payers and therefore almost always  results in less than the total foreign taxes paid; (B) the disallowed  foreign tax credit can be carried forward or backward as long as there is foreign earned income.

(b)  Married Filing Separate ( MFS), requires the H-1 spouse file as normal , recognize all US sourced income ( even if there are passive income ( like bank interest )  held in both names/SSNs --- NonResident Alien  alien tax rate on passive income can be much higher ( flat 30% in many cases ).  This also means  reduced standard deduction but also lower AGI for H-1spouse.

(c) in case of H-4 spouse  filing jointly  and with foreign earnings, SECA/FICA ( Social Security and Medicare  taxes ) rules comes into play ( even though ameliorated / modified  by Totalization agreement between US and Canada.  This needs to be considered  with a view of the longer term plans of the taxpayers.

I hope this and items  posted by @DaveF1006 ) together gives you enough to decide on the path forward.

Is there more I can do for you ?

pk

[gur1]

Thank you   @pk.

All your understanding is correct . In addition to that  I do have a kid (US citizen) living with my wife in CANADA 

Request your input on Foreign tax credit.  What I understand from your and @DaveF1006  explanation is that we have option to file MFJ and treat my spouse as resident Ailen as I am resident Ailen.

.Does the below text from IRS website mean that if the nonresident Ailen is treated as resident Ailen then you can't claim tax treaty benefits? Does this mean she can't get Foreign tax credit for taxes paid in CANADA?

 "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"https://www.irs.gov/individuals/international-taxpayers/nonresident-spouse

In 2021 year we filed MFJ. My spouse was a resident Ailen as she passed the presence test. We declared her CANADIAN income and got foreign income tax credit on the USA tax return. In 2022 she did not pass presence test 

[pk]

@gur1 ,

On your child whom stays with your H-4 spouse,   --- a child whom is a resident of Mexico  or Canada  and for whom you  pay at least 50% of "living expenses" , can be your dependent.

So you are saying that for 2022, counting all days present in the USA ( including all visitation full days ), plus  1/3 rd of all days present in 2021 plus 1/6th of all days present in the USA  spouse H-4 does not meet  Substantial Presence Test -- yes ? And therefore you both want to treat H-4 as a resident for the whole in 2022 -- yes?  Note that in this case full year would start from the first day she was present  ( Jan 1 ? ) in the USA and end on 12/31/2022.

As a resident of USA  you cannot generally take advantage of treaty benefits of another country  ( generally home country) , but this does not include the double taxation reduction - because while this is included in the tax treaties, US directly  includes this provision under US tax laws -- See Pub 54 >>>> https://www.irs.gov/forms-pubs/about-publication-54

Another point -- because H-4 spouse started her foreign tax home in August 2022 ( yes ? ), she will not meet the 12 month test period till at least anniversary of that date  and therefore you cannot file for Foreign Earned Income exclusion till after that date --- you need a continuous 12 month period ( that spans the tax year under consideration i.e. starts or ends in the tax year) during which she can meet the 330 days away from USA requirement.

You say in 2021 , her earnings were reported as foreign -- meaning she lived and worked in Canada? -- Are you saying therefore  that she actually moved / started her foreign tax home  in the 2021?   If that is so then  I would suggest for you to prepare the return in two different ways and see which is more  US tax benign to you ...

1. Prepare  as filing  MFJ -- including her income as if she is a resident, excluding her foreign income ( including allowable housing costs) but getting the standard deduction of a married couple

2. Prepare  as filing MFS -- not showing her income ( but including the US sourced  interest income in your own world income); she files nothing to the USA.

 My concerns are  (a)   that the simplest path being MFS -- leaving her income out of USA ( and not having to pay  FICA/SECA at 15.3%) , may be more beneficial than getting the extra standard  deduction of approx $13,000  and (b) I am not sure if eligibility of the H-4 spouse to be a resident alien --- see this >>> https://www.irs.gov/individuals/international-taxpayers/residency-starting-and-ending-dates.

Also as I said earlier , things/steps may depend on ( i.e. eye towards ) your longer-term plans -- do you plan to settle here  or go back to your home country ( India ) or settle in Canada

Is there more I can do for you ?   We may be reaching a point where any further  discussion may be of specific interest to you only ( and therefore PM may be better ) -- because your situation is somewhat unique.

Namaste

pk

[DaveF1006]

According to the US/Canada tax treaty:

1. Regardless of your citizenship, you have to pay Canadian income tax if you live and work in Canada.
2. The U.S. bases taxation on both your residence and citizenship status. In Canada, your tax obligations are based on your residency status, which the CRA determines for you.
3. Canada and the U.S. have a tax treaty to prevent double taxation for Canadian residents earning U.S. income and U.S. citizens working and living in Canada.

Based on this assumption, she would not be able to claim a foreign tax credit for 2022 since does fall within these parameters that are listed above. In 2022, you may treat her as a resident alien for tax purposes only but she does not fall within the legal guidelines of a citizen or legal resident alien in 2022to claim the Foreign Tax Credit.  

@gurj