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Nonresident alien spouses

Technical topics regarding tax preparation.
#1
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I just want to clarify something regarding nonresident alien spouses. Please someone help me verify if this is correct, I'm putting together an informational pdf with unique filing situations.

If a U.S. Resident has a nonresident alien spouse, and they do NOT make the election to treat the nonresident alien spouse as a resident for tax purposes, then:

1. They cannot file jointly. They must file MFS or HOH (whichever applies)
2. If U.S. taxpayer's nonresident alien spouse does not have any income, then the U.S. taxpayer can claim an exemption for their nonresident alien spouse.

So, how is this actually done? In the case of an MFS return, does the U.S. taxpayer file an MFS return, and then claim a personal exemption for the nonresident alien spouse on Form 1040 line 6b (not a dependency exemption on line 6c)? I've never actually seen this done, so I want to make sure I'm understanding this concept correctly.
 

#2
makbo  
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Yes, they claim a spousal exemption on line 6b (although I suppose some would call it a personal exemption). It's no different than the case where the non-filing, no-income spouse is a US resident, which is a type of return I have prepared before. This is explained very simply in about half a column in Pub 17 under "Your Spouse's Exemption". Note that to be claimed in this scenario, no one else can be able to claim the spouse as a dependent.

In my software there is a checkbox to indicate whether the NRA spouse has no ITIN. If no ITIN, instead of the spouse's name on line 3, it prints "NRA".
 

#3
Guya  
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In this scenario the IRS insists that the NRA spouse has an ITIN. Consequently I have had many clients who refuse to apply for ITINs even if it saves tax because many NRAs want to have nothing at all to do with the United States.

If an ITIN is required; you would do best to use a Certified Acceptance Agent local to where the spouse lives. Having been a Certified Acceptance Agent since the year 2000, I'd be pleased to help you with this if needed.
PS – Greeting from London, England. Grey and rainy ...
 

#4
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Thank you, this is very helpful.
 

#5
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Correct me if I'm wrong but to do number 2 in the OP the nra must make the election to be taxed as a resident, correct?
 

#6
makbo  
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Terry Oraha wrote:Correct me if I'm wrong


Pretty sure you're wrong. As per the OP, "they do NOT make the election to treat the nonresident alien spouse as a resident for tax purposes". Again, see Pub 17.
 

#7
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Correct me if I'm wrong but to do number 2 in the OP the nra must make the election to be taxed as a resident, correct?


Makbo is correct. In order to take a personal exemption for a nonresident alien spouse an a separate return, the spouses must not:

1. File jointly
2. Not elect to treat the nonresident alien spouse as a resident.

I got this information from Publication 519, U.S. Tax Guide for Aliens. I'm sure it's in Pub 17, too.
 

#8
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That's very interesting. I found it odd that an exemption would be allowed for the US taxpayer even if an NRA spouse had foreign income. According to your Pubs it all fair as long as the NRA spouse has no U.S. source income.

Thank you!
 

#9
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Note that the NRA spouse must have had no gross income during the year. So, if the U.S. resident alien spouse earned income in a community property state, then it's likely that the NRA spouse did have gross income (one-half of the U.S. resident alien spouse’s earnings), which would disqualify the spouse as a dependent. See Trolinger v. Commissioner, T.C. Memo. 1988-333.

[Edited to correct name of court case]
Last edited by DaveFogel on 30-Nov-2015 11:43am, edited 2 times in total.
 

#10
Smktax  
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Dave, wouldn't Code §879(a)(1) override this result?
 

#11
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I found it odd that an exemption would be allowed for the US taxpayer even if an NRA spouse had foreign income.


That is not my understanding. I think Dave Fogel is right. The pubs say that the nonresident spouse can have no income during the year in order for the resident spouse to take the exemption on a separate return.
 

#12
Guya  
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The NRA spouse can have $1 million or more dollars of foreign source income, so long as it is not gross income for US purposes. Even $1 of US source income would remove the exemption.
PS – Greeting from London, England. Grey and rainy ...
 

#13
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Smktax wrote:Dave, wouldn't Code §879(a)(1) override this result?

Good point, but it depends upon the type of community income. IRC §879(a)(1) and Treas. Reg. §1.879-1(a) do in fact provide that wages, salaries or other amounts received as compensation for personal services that is community income of a U.S. citizen or resident married to a nonresident alien spouse shall be treated as the income of the spouse who actually performed the personal services, but there are other types of community income that don’t receive this treatment and are split between the spouses, such as unearned income. See IRC §879(a)(4).

But if the earned income is not split between the spouses, then how do you explain the decision in the Trolinger case? IRC §879 was added to the Code before the taxable years at issue in the Trolinger case, so shouldn’t it have applied to the husband's community wage income in that case?

[Edited to correct name of court case]
Last edited by DaveFogel on 30-Nov-2015 11:43am, edited 2 times in total.
 

#14
Nilodop  
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In Trolinger, spouse was not a NRA.
 

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Thanks for pointing that out. I totally missed it.
 

#16
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Even $1 of US source income would remove the exemption.


Thanks Guya my understanding of the law was incorrect, then.

In the case of community property, would a pre-nuptual or post-nuptual agreement be a solution to this problem? What I mean is, if the taxpayers realize that there may be community property during the year that would trigger the NRA spouse to have a filing requirement or U.S. Source income, can the spouses use a properly drafted marital contract in order to dissolve community property and avoid this issue?
 

#17
makbo  
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The exemption deduction for the spouse who meets the requirements (whether NRA or not) is what, $4K? And subject to being phased out for regular tax, or never counting in the first place for AMT? Is the cost of complicated nuptial agreements to allow this deduction really worth it? Is the tax tail wagging the dog?
 

#18
WEISSEA  
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"In the case of community property, would a pre-nuptual or post-nuptual agreement be a solution to this problem?"

Would think so. In CA one can do a simple Marital Agreement to transmute community property to spearate property Fam Code 850(a) or vice versa Fam Code 850(b)-(c). Separate to community property agreement often done as part of a Living Trust package. Check your State laws.

IRS IRM 25.18.1.2.26 (03-04-2011)
Premarital and Post-Marital Contracts Between Spouses
1.Community property states have created laws allowing spouses to contract out of the application of normal community property laws. The states have different rules concerning when this may occur and how notice of these agreements is given to affected third parties, such as creditors. These rules vary greatly between the community property states. A summary of the treatment of these contracts by the various community property states is shown in Exhibit 25.18.1-1, Comparison of State Law Differences in Community Property States. Refer to the applicable state law for each state for a more detailed discussion of these rules.
 

#19
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Is the cost of complicated nuptial agreements to allow this deduction really worth it?


I'm not thinking about the small cost benefit of taking the exemption, but the benefit of avoiding the allocation of income to the NRA spouse who probably doesn't want to deal with that kind of headache.
 


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