Tag Archives: Americans abroad

“Married filing separately” – The hidden tax on #Americansabroad who marry a non-U.S. citizen

 

Just when you thought it couldn’t get worse …

Marriage between a U.S. citizen spouse and a non-U.S. citizen spouse will have tax complications. That said, one of the most insidious is the virtual certainty that that U.S. spouse will NOT bring the non-citizen spouse into the U.S. tax system. This will be achieved with the non-U.S. citizen spouse using the “married filing separately” category. “Married filing separately” is an extremely punitive filing category.

To put it simply:

Those who file “married filing separately” will almost always pay more tax.

Your tax filing category will impact:

– the amount of tax you pay in terms of your specific tax bracket – “married filing separately” is the most punitive tax rate; and

– the threshold for when certain taxes (example the Alternative Minimum Tax) (and the 3.8% Obamacare surtax)* kick in. Almost all taxes kick in at a lower monetary threshold;

– the thresholds for reporting requirements (example the level of foreign assets for FATCA 8938 reporting). On December 7, 2014 the information from the IRS stated:

Reporting thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad; or more than $50,000, if you live in the United States. If you file jointly with your spouse, these thresholds double. You are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.

Married filing separately is the worst possible filing category. It is also the default filing category for U.S. citizens abroad who marry non-U.S. spouses (AKA “Aliens”). I wonder what Boris Johnson would think of this.

It’s as though the U.S. government regards your marriage to a foreign spouse as a form of tax evasion.

*Of those subject to the new New Investment Income Tax (3.8% Obamacare surtax) Americans abroad will certainly be (assuming it applies to them) the most severely affected. Why? Because it impacts those who file “married filing separately” the most!

To put it simply: The Obamacare surtax is to fund Obamacare which is health insurance for Homelanders. Yet, the primary victim of the tax will be Americans abroad! Oh well, that’s more “change we can believe in”.

 

 

Related articles

#Americansabroad and their non-U.S. pensions

The article referenced in the above tweet provides a good introduction to the complexities of non-U.S. pensions for Americans abroad. The reality is that many Americans abroad have them. Pensions are one more example of difficult it is for Americans abroad to both be U.S. tax compliant and do normal financial and retirement planning. It can’t be done.

Excerpts from this necessarily general but good overview include:

 

Expatriates working abroad often participate in a funded foreign pension plan of a foreign company. In order to avoid double taxation, these individuals should beware of the tax treatment of both contributions to, and distributions from, these foreign plans.  To select the most tax effective approaches, one needs to know the general rules, the availability of foreign tax credits, and treaty provisions which may exist between the US and a foreign government.

While a foreign pension plan usually provides favorable tax treatment within its national jurisdiction, the general rule is that it is not a qualified retirement plan (“QRP”) under the Internal Revenue Code (“IRC”) for US income tax purposes and thus, any contributions are not deductible by the employer or employee on their US tax returns.  In contrast, the IRC provides numerous tax benefits for participants in US QRPs, including an exclusion or deduction from gross income for contributions, investment in a tax-exempt trust, and favorable distribution rules, such as a tax free rollover.

The moral of the story is that as a U.S. citizen you can either:

1. Live abroad; or

2. Have a pension

But, its very difficult to achieve   both.

 

 

 

 

Related articles

2013 U.S. Tax Change Review from @ThunFinancial

 

Of particular interest in this seminar are:

1. Discussion of the 3.8% Obamacare investment tax – likely not creditable

2. Punishment for using “married filing separately” category. The lower thresholds virtually guarantee “double taxation”