To Include or Not to Include Your Foreign Spouse’s Income on Your US Expat Tax Return
Living overseas and married to a non-resident alien spouse (that is, not a US Citizen or Green Card Holder), you can choose to file jointly and add your spouse's income but there are situations, however, when it doesn’t behoove either of you to take this step.
When you are a United States Citizen and you are married to a US Citizen, Resident, or Green Card Holder, you have the option of filing as MFS (Married Filing Separately) or MFJ (Married Filing Jointly). You must choose one of these options if both partners in the marriage are considered US Persons.
When you are married to a non-citizen, however, and living in another country, you have different options; you don’t have to include your foreign spouse’s income, but you are allowed to report your spouse’s income on your US expat tax return if you wish.
There are also significant benefits to filing a joint return.
These include larger deductions and more tax credits. Contributions to a ROTH IRA are virtually impossible for taxpayers filing separately (income must be less than $10,000). If you're married to a non-US citizen, you may be in a situation where it makes sense to claim your foreign spouse's income on your US expat tax return - especially if your foreign spouse's income is significantly less than your own.
One of the most beneficial tax exclusions available to US expats is the Foreign Earned Income Exclusion (FEIE). As a single taxpayer, you can exclude up to $126,500 (for income in 2024). If you file a joint return with your spouse, the maximum exclusion is doubled, for $253,000.
For example, if you earn $140,000 per year and your foreign spouse earns $120,000 or less, then up to $253,000 of your combined income could be excluded using the FEIE. Any remaining taxable income could then be further reduced by the standard deduction of $29,200 for joint filers and possibly other personal exemptions and credits. The result: zero or minimal taxable income.
Suppose you choose not to include your spouse's income.
In that case, you may owe tax on the portion of your income that remains taxable after applying the FEIE, standard deductions, and any allowable credits.
If you have dependent children, the credits are larger for those who file as married filing jointly (MFJ). For example, the Child Tax Credit provides up to $2,000 per qualifying child, with up to $1,600 refundable beginning in 2024.
In addition, if your foreign spouse or a dependent of yours is attending college, you may be able to claim the American Opportunity Credit, which provides up to $2,500 per student for qualified education expenses, with up to $1,000 refundable.
It may make fiscal sense for you to file separately (MFS) and not include your foreign spouse’s income. This is particularly true if your foreign spouse has a high income or owns foreign financial accounts.
When you file an individual return, you are not liable for taxes on your foreign spouse’s income; you are only taxed by the United States on your worldwide income. You may have a long list of miscellaneous deductions for which you need to file Schedule A with your return.
If you are deducting these expenses from your sole income, your AGI (Adjusted Gross Income) will be lower than it would if you had included your foreign spouse’s income on your US expat tax return.
You may elect to include your foreign spouse’s income on your US expat tax return, but there are long term consequences to this decision. Furthermore, if you divorce and become involved in another marriage you will not be eligible to make the election to file jointly with the new spouse.
Having considered all of the above and assuming the risks and limitations, you may elect to file a joint income tax return with your foreign spouse. In order to do this, you must prepare a written statement and include the statement with your US expat tax return that you send to the IRS.
It’s important to note that this is a one time election. Your foreign spouse will be required to report all income and foreign financial accounts in future years.
If you decide you no longer want to include your foreign spouse’s income on your US expat tax return, you will have the opportunity to revoke the election to file a joint return with your foreign spouse. Once you’ve made the election and revoked it, you never have that option again in your lifetime – even if you remarry.
Furthermore, your foreign spouse may be the sole owner of one or more foreign financial accounts. Once you elect to include your foreign spouse’s income on your US expat tax return, he/she is required to report all foreign assets.
There are stiff penalties for misfiling or failing to file FBAR, FinCEN Form 114 and other required FATCA forms like Form 8938. You and your foreign spouse should be fully aware of these additional financial accounts reporting tarequirements.