Generally, the number of days an individual spends in a country is one of the important determinants of taxability in such country. But it is not the only one! Certain countries have additional determinants, like the U.S. determines residence based on citizenship. The U.S. tax law classifies U.S. citizens as U.S. tax residents regardless of their time spent in or outside the U.S. A U.S. citizen is taxable on a worldwide basis. This is in contrast to the Indian residence-based taxation under which an Indian citizen who is a nonresident Indian will only be taxed in India on his or her Indian-sourced income. The residence rules for natural persons both in the U.S. and India have been discussed in our earlier blogs.
Often U.S. nonresident individuals married to U.S. citizens are clueless if they also need to comply with the U.S. tax requirements along with their spouses, specifically when they are staying outside the U.S. and neither hold U.S. green cards nor they earn any U.S. sourced income. Below are the options to consider under the U.S. tax laws for such nonresident spouse of a U.S. citizen:
– They choose to treat nonresident spouse as a U.S. tax resident and elect to file a joint tax return in the U.S.: The U.S. citizen can choose to treat his or her nonresident spouse as a U.S. tax resident and file a joint tax return in the U.S. Both need to sign and attach a statement declaring their current U.S. residential status and choose to treat nonresident spouse as a U.S. tax resident for that tax year. In doing so, following rules apply:
1. Both are treated as U.S. tax residents for U.S. tax purposes for all the years the choice is in effect.
2. Both have to file a joint tax return in the year they elect. Subsequently, they can choose to file joint or separate tax returns
in the U.S.
It is also important to note that they must continue to file their joint or individual tax returns in the U.S. unless they choose to end their election. Such choice can be suspended if either spouse revokes the choice in writing, spouse dies, a legal separation or divorce, or the U.S. revenue authorities end the choice because it feels that the records are not adequate.
– They do not choose to treat nonresident spouse as a U.S. tax resident and the U.S. citizen files his or her individual U.S. tax return: If the spouse of a U.S. citizen was a nonresident of the U.S. at any time during the tax year and they do not choose to treat the nonresident spouse as a U.S. tax resident, then the U.S. citizen is treated as unmarried for head of household purposes. The U.S. tax citizen may be eligible to file as head of household if he or she has another qualifying relative and meets the other tests. Alternatively, the filing status is “married filing separately” and not “single”.
A decision to treat a nonresident alien spouse as a U.S. tax resident and electing to file a joint income tax return can be advantageous as a higher standard deduction is available. Additionally, foreign earned income exclusion can reduce the U.S. tax costs. However, the additional compliance requirements cannot be overlooked as the worldwide income of both U.S. citizen and nonresident spouse needs to be reported until the election is ended or suspended.