The Tax Corner
by John Ohe (IRS Enrolled Agent).
This month, we discuss two topics: U.S. tax implications involving a foreign spouse; and the best way to file a tax return extension.
Question: Should I include my foreign spouse on my U.S. tax return?
To the IRS, a spouse is usually considered foreign when he or she is a not a U.S. citizen and does not hold a green card. In such instances, U.S. expats can file as “married filing separately,” and exclude the foreign spouse’s income. Alternatively, they can file jointly and include the spouse’s income. There are pros and cons to each option.
(1) Married filing separately (excluding spouse’s income)—Foreign spouses are not required to report their income to the IRS. Therefore, if a foreign spouse has significant income, there is little reason to include this amount in a joint filing. By excluding the spouse’s income, the foreign spouse is also not required to report foreign assets. As a possible wealth management strategy, the U.S. spouse can also transfer assets to the foreign spouse, thus providing shelter against future tax liabilities and/or reporting requirements. Annual limitations do exist in terms of how much asset can be transferred to a foreign spouse.
(2) Filing jointly with a foreign spouse—Given the above, why would any U.S. expat include the foreign spouse in a joint tax filing? The main reason is to take advantage of the higher standard deduction and exemption amounts. This approach works when the foreign spouse has little or no income. To file jointly, the foreign spouse will have to obtain a SSN or ITIN. Important to note: Once the foreign spouse is recognized as a U.S. taxpayer, this status is not something that can be easily turned off.
Question: What’s the best way to get an extension on my U.S. tax return filing?
April 15 is the due date that most U.S. citizens are familiar with for tax filing. However, did you know that U.S. expats automatically receive a two-month filing extension? If filing by June 15 is not possible, then one can submit an extension to Oct. 15 by completing Form 4868. The simplest way to file an extension is on-line. There are several vendors that facilitate the process. In the past, we have recommended “Official Payments” (www.officialpayments.com).
The process of filing an extension is quite easy if one does not owe taxes. However, the process is a bit tricky if there is a tax liability. One will have to estimate how much taxes are owed, and pay that amount while filing the extension. Lastly, U.S. expats who need the filing extension to qualify for the foreign earned income exclusion (for the first time) should file Form 2350, rather than Form 4868.
It is important to keep in mind that filing an extension does not exempt one from certain penalties and interest charges. When in doubt, seek professional assistance.
If you would like to submit a tax-related question, please email: firstname.lastname@example.org. Responses are provided by John Ohe (IRS-authorized enrolled agent), who resides in Antigua.
Disclaimer: The answers provided in this article are for general information, and should not be construed as personal tax advice. Tax laws and regulations change frequently.