Crazy rules and terminology regarding claiming dependents vis-a-vis Non-Resident Alien and Married Filing Separately status

[dag444gad]

I'm a US citizen married to a non-resident alien. We reside abroad, together, and have children who live with us. As my spouse has no desire or requirement to report anything to the IRS I have always filed as married/separately.

In most prior years I claimed our children as dependents. Recently, however, my spouse's income increased above mine. Now, TurboTax's interview suggests that, as a result, I cannot claim them as dependents unless I file a Form 8332 in which my spouse waives the right to claim them.

Form 8332 has language like custodial and non-custodial, which seems crazy to me because we are married, live together, and support the children together. My spouse simply now earns more than I do.

This distinction never really mattered before but it does now due to this stimulus payment and recovery credit business. So, it seems to me I now need to file a 1040X & 8332 for the prior year in which I did not claim the dependents, so that I can now, for 2020, claim them as dependents and obtain the full recovery rebate credit to which I'm entitled.

My spouse, however, may not like the notion of the term "non-custodial" being applied to them. For my part, I believe this is only intended in a tax sense, that it doesn't imply any actual custodial arrangement between us.

Have I understood the situation correctly as it applies to us?

We have never bothered to obtain a TIN for my spouse due to the hassle of doing so and there being no benefit to us. Now, of course, I'll have to submit a W-7 along with my prior-year 1040X, 8332, and current-year 1040.

[pk]

@dag444gad , as I understand from your post :

(a) you a US citizen are married to  a non-Resident Alien, have  children, live abroad along with your spouse and children abroad

(b) your past tax filing status  has been  MFS ( Married Filing Separate ) and you do not have  tax id   ( SSN or ITIN ) for your spouse.

(c) your spouse  now  has  foreign earnings  -- i.e. local earnings but NO US sourced earnings

(d) 2020 you wish to include your children as  dependents, assuming that they have a tax ID ( SSN or ITIN).

 (a) Since you are maintaining a household for your children, you can always file as  Head of Household ( HoH ) --- this ameliorates   the tax situation --- your standard deduction  is halfway between  single/MFS and  Married Fling Joint ( MFJ)

(b) Note that if your  spouse files with you  ( along with an ITIN), and a  note signed by both  wanting to treat her as a US resident, her world income  gets taxed  by the USA   ( even though  her  earnings may come under  foreign earned income exclusion).

(c) If your spouse has no desire to  currently return to USA, then it may be simpler to  get the ITIN/SSN for the children and  you file as  HoH -- you get all the benefits  and yet her earnings are  not taxed by the USA.  She can then change her status as and when she deems  worthwhile.

(d) HoH filing status does mean  that you become the  "custodial parent" for tax purposes  but has nothing to do with  anything beyond that-- does not abridge her  rights as a parent. -- This is only because  she as a "no-resident -alien" is a Non-US Person for tax purposes.

(e) This is pretty common situation for many US citizen ( not just the young ones either )whom have settled down  abroad.

Is there more I can do for  you?    BTW  I do not believe that TurboTax would require you to get a signed  statement   releasing  her rights to claim the children --- she is NRA ( and there is I believe , an exclusion for that )

Perhaps you should go through  the following "

1.  https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad-head-...

2. https://www.irs.gov/pub/irs-pdf/p501.pdf ----------

                   "Nonresident alien spouse.

You are considered
unmarried for head of household purposes
if your spouse was a nonresident alien at any
time during the year and you don't choose to
treat your nonresident spouse as a resident
alien. However, your spouse isn't a qualifying
person for head of household purposes. You
must have another qualifying person and meet
the other tests to be eligible to file as head of
household."

3.  https://www.irs.gov/forms-pubs/about-publication-54

Is there more I can do for you ?

[LinaJ2020]

Yes, that is correct.  Technically you both do not fall into the requirement of Form 8332 as you both are not separated or divorced.  Filing the form mainly to show the other parent is waiving the right to claim and let you claim instead. 

As you mentioned, MFS does not require your spouse to have an ITIN.  You might not able to e-file but still can prepare forms in TurboTax.  As far as stimulus, only those who have a valid social security number qualify for the payment.  ITIN would not qualify. 

[dag444gad]

( c ) is almost correct. My spouse has long had foreign earnings, but only recently have they increased past my own to be more than half.

The Head of Household status appears to require that my income is more than half of the household's, which is no longer true.

My children have SSNs, but we just never bothered to get a TIN for my spouse because my spouse has never had any US-sourced income and thus no obligation whatsoever to file with the IRS.

It seems to me I'll just have to get the TIN and file an 8332 one time for the year in which my spouse's income became more than half of the household's, as well as for “all future years.” I guess that should cover it.

[pk]

@dag444gad  the requirement is  to have contributed more than half of household expenses for  maintaining a household for the children -- not the  actual income. 

On the other hand if you are  going to file joint   then consider excluding both your incomes from US taxes -- each must file form 2555.

I don't know which country you are in  but it is strongly suggested that  (a) you read up on the  tax treaty between US and that country and (b) perhaps  visit the nearest US Consulate -- they often will have an IRS section  that can advise  you

Is there more I can do for you ?

[dag444gad]

@pk If household expenses are basically split down the middle, then it's hard to say who pays more. Moreover, I can imagine the IRS may demand evidence if I claim head of household without really knowing that I definitely pay "more than half."

I'll definitely continue to file as married-separately.

I have a couple other questions, but I'll post them separately.

Thanks for your help!

[pk]

@dag444gad  of course

stay safe

pk