CR1, Green Card Test and MFJ

[analitikas 3]

Hi

 

I would like to file taxes as married filed jointly, but my spouse has only become a green card holder in the second part of the year (2021). Since this would pass the green card test, but not the substantial presence test, we need to make an election (write a statement) manually and file by paper? I am just reading publication 519.

 

It sounds like an alternative is to file MFS, but then neither of us can take the standard deduction and we must itemize?

 

Starting from 2022, it should be back to normal filing?

 

Thanks

 

 

[Timona 4,207]

@JeanneAdil knows a thing or two about IRS

[iwannaplay54 985]

48 minutes ago, analitikas said:

Hi

 

I would like to file taxes as married filed jointly, but my spouse has only become a green card holder in the second part of the year (2021). Since this would pass the green card test, but not the substantial presence test, we need to make an election (write a statement) manually and file by paper? I am just reading publication 519.

 

It sounds like an alternative is to file MFS, but then neither of us can take the standard deduction and we must itemize?

 

Starting from 2022, it should be back to normal filing?

 

Thanks

 

 

We filed MFJ before my wife ever stepped foot in the US.

The test you are referring to is related to how to treat the foreign earned income and the usual is to declare the spouse resident for tax purposes, use the physical presence test to exclude a percentage of the foreign earned income for the tax year, and apply the normal deduction. Turbotax can do it, at least thats what we used with foreign earned income.

[iwannaplay54 985]

The filed letter is for non-resident, not resident, aliens.  Your wife is a resident alien.  File as MFJ, declare and exclude whatever percentage of income the exclusion allows (it’s prorated) and move on.

[analitikas 3]

1 hour ago, iwannaplay54 said:

We filed MFJ before my wife ever stepped foot in the US.

The test you are referring to is related to how to treat the foreign earned income and the usual is to declare the spouse resident for tax purposes, use the physical presence test to exclude a percentage of the foreign earned income for the tax year, and apply the normal deduction. Turbotax can do it, at least thats what we used with foreign earned income.

 

32 minutes ago, iwannaplay54 said:

The filed letter is for non-resident, not resident, aliens.  Your wife is a resident alien.  File as MFJ, declare and exclude whatever percentage of income the exclusion allows (it’s prorated) and move on.

That was the initial plan. MFJ, FEIE/FTC and move on. However:

- publication 519 on IRS says that residency starts on the first day in the calendar year when you became a lawful permanent resident. (page 8 )

-- also referenced here https://www.irs.gov/individuals/international-taxpayers/us-tax-residency-green-card-test ("....If you meet the green card test at any time during the calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day on which you are present in the United States as a lawful permanent resident..."

 

- would this mean a permanent resident is then considered a dual status alien for the year?

- if so, a dual status alien is restricted from getting a standard deduction?

 

All of this seems to go away with a manual election for the full year tax resident and my question is really whether ticking the boxes in TurboTax is really sufficient. 

Edited January 31, 2022 by analitikas

[Merica-n 65]

MFS is generally not a favorable filing status and in addition to the reduced deduction will result in increased tax rates and make you ineligible for certain tax benefits.  Except in special situations where your foreign spouse had large amounts of foreign income that you want to avoid being taxed and/or you had low income, MFJ will generally result in a better result.

 

Making the 6013g election and paper filing is recommended and is generally a no brainer in most situations.

 

The IRS proper procedure for making an election is:

Quote

(4) Time and manner of making an election.

(i) A husband and wife shall make the  election under this section by attaching a statement to a joint return for the first  taxable year for which the  election is to be in effect. The  election must be made before the expiration of the period prescribed by section 6511(a) (or section 6511(c) if the period is extended by agreement) for making a claim for credit or refund. If either or both  spouses die after the close of the  taxable year but before the joint return is filed, the election may be made by the executor, administrator, or other  person charged with the  property of the deceased  spouse. If the  election is made with a joint amended return, the amended return should be made on Form 1040 or 1040A, the word “Amended” should be written clearly on the front of the return, and an amended return also must be filed for each subsequent  taxable year as to which a return previously has been filed by either  spouse.

(ii) The statement must contain a declaration that the  election is being made and that the  requirements of paragraph (a)(1) of this section are met for the taxable year. The  statement must also contain the  name, address, and  taxpayeridentifying number of each  spouse. If the  election is being made on behalf of a deceased  spouse, the  statement must contain the  name and address of the executor, administrator, or other  person making the  election on behalf of the decreased  spouse. The  statement must be signed by both  persons making the election.

 

Link:  https://www.law.cornell.edu/cfr/text/26/1.6013-6

So after you print from turbotax, you should make sure that:

1. Statement declares a 6013g election is being made for your spouse to be treated as a full year resident and the requirements for paragraph (a) (1) are met for taxable year.

2.  Statement contains name, address, and social security number or itin of each spouse.

3.  Statement is signed by both persons making the election.

4.  The return filing status is married filing jointly

 

If turbotax prints your return this way, then it is sufficient and you've done it correctly

[Merica-n 65]

Also, I think previous posts are conflating two issues.  You need to file the election to avoid being a dual status alien and file jointly, but you can still file 2555 to exclude foreign income/housing deduction etc or take a foreign tax credit as a us resident.  US tax residency uses a test called the substantial presence test, while foreign income exclusion uses a test called the physical presence test.

[analitikas 3]

22 minutes ago, Merica-n said:

MFS is generally not a favorable filing status and in addition to the reduced deduction will result in increased tax rates and make you ineligible for certain tax benefits.  Except in special situations where your foreign spouse had large amounts of foreign income that you want to avoid being taxed and/or you had low income, MFJ will generally result in a better result.

 

Making the 6013g election and paper filing is recommended and is generally a no brainer in most situations.

 

The IRS proper procedure for making an election is:

So after you print from turbotax, you should make sure that:

1. Statement declares a 6013g election is being made for your spouse to be treated as a full year resident and the requirements for paragraph (a) (1) are met for taxable year.

2.  Statement contains name, address, and social security number or itin of each spouse.

3.  Statement is signed by both persons making the election.

4.  The return filing status is married filing jointly

 

If turbotax prints your return this way, then it is sufficient and you've done it correctly

thanks. I also read from the guide that I need to attach a piece of paper stating the election.

 

5 minutes ago, Merica-n said:

Also, I think previous posts are conflating two issues.  You need to file the election to avoid being a dual status alien and file jointly, but you can still file 2555 to exclude foreign income/housing deduction etc or take a foreign tax credit as a us resident.  US tax residency uses a test called the substantial presence test, while foreign income exclusion uses a test called the physical presence test.

Having lived abroad myself, I am familiar with forms 2555 and 1116. FEIE is great for incomes under the threshold.

 

Let's say you exclude income via 2555, then the excluded income is assumed to be in the lowest tax bracket? Any W2's or unexcluded income goes in the higher tax bracket raising your tax liability. 

[JeanneAdil 6,492]

13 hours ago, Timona said:

@JeanneAdil knows a thing or two about IRS

Thank u 

i take the classes every year on all the updates and the changes year to year would astound the masses

i wouldn't even try to do a return for a business 

[Merica-n 65]

1 hour ago, analitikas said:

Let's say you exclude income via 2555, then the excluded income is assumed to be in the lowest tax bracket? Any W2's or unexcluded income goes in the higher tax bracket raising your tax liability. 

The way the way additional or excluded income impacts your tax bracket can get confusing.

 

The thing is that you're deciding between the MFS bracket with dual status and the MFJ bracket with the election, so generally if the US Citizen earns enough income where they actually owe on the tax line, and the Foreign spouse makes a small income that gets excluded or wiped away by the standard deduction, the MFJ choice results in a much lower tax liability and is a no brainer.  I think this situation applies to most people on these forums as the us citizen spouse generally needs an actually taxable income to sponsor, and the median income in many other countries for a partial year is lower than our increased standard deduction.

 

If the US Citizen earns $100,000+ and the foreign spouse's income is under 15k, the filing status savings of MFJ over MFS or single without any dependents can easily be $10k-30k per year.

[Wuozopo 4,293]

6 hours ago, analitikas said:

Let's say you exclude income via 2555, then the excluded income is assumed to be in the lowest tax bracket? Any W2's or unexcluded income goes in the higher tax bracket raising your tax liability. 

I think I see where you are going with this. Most in this forum don’t ever get that sophisticated in their thinking.  
 

The FEIE doesn’t “erase” your income as many assume. It takes off the taxes that income all by itself would incur. So if a smallish amount, the tax it incurs would be calculated in a lower bracket. Then that tax amount is subtracted form the full tax both incomes would incur (at a higher rate/bracket). So taxes are figured on all the worldwide income (probably high bracket for some) but the exclusion is only the taxes the foreign excluded (could be a lower bracket). So yes while claiming the FEIE does reduce your tax bill,  it’s not at an amount that just erasing the foreign income as if it never existed would reduce it. 

But wait there’s more…

When figuring the total tax charged on a joint return with FEIE, the tax tables are not used. Tax worksheets (found in the instructions for 1040) are used instead. There is also a hierarchy that comes into play. For example if one has a Schedule D for investments, the foreign income is used with the US spouse’s income (all the worldwide income)  when determining the amount/percentage  of capital gains taxed. I’m not going into deep details of this because you may not even have capital gains. But tax for these situations, with a form 2555 and a Schedule D, go through the hierarchy of Qualified Dividends and Capital Gains Worksheet, then the Foreign Earned Tax Worksheet to determine you tax bill. You can see those worksheets on page 35 and 36 of the 1040 Instructions. Do note the footnote instructions for the foreign income tax calculation worksheet.  BUT it will scramble your brains trying to get your head around it. The best way is let TurboTax do all the figuring and mathematical gymnastics of those worksheets and figure your tax in an instant. 
 

But still with all the convoluted instructions (eliminated if you let TurboTax do it’s thing) you will still save money filing a joint return. You can do two returns, with the American filing separately and no foreign income reported just to check out your specific situation. Then compare Line 24 Total Tax on both returns.  Use the filing that has the lowest total tax.

[analitikas 3]

17 minutes ago, Wuozopo said:

I think I see where you are going with this. Most in this forum don’t ever get that sophisticated in their thinking.  
 

The FEIE doesn’t “erase” your income as many assume. It takes off the taxes that income all by itself would incur. So if a smallish amount, the tax it incurs would be calculated in a lower bracket. Then that tax amount is subtracted form the full tax both incomes would incur (at a higher rate/bracket). So taxes are figured on all the worldwide income (probably high bracket for some) but the exclusion is only the taxes the foreign excluded (could be a lower bracket). So yes while claiming the FEIE does reduce your tax bill,  it’s not at an amount that just erasing the foreign income as if it never existed would reduce it. 

But wait there’s more…

When figuring the total tax charged on a joint return with FEIE, the tax tables are not used. Tax worksheets (found in the instructions for 1040) are used instead. There is also a hierarchy that comes into play. For example if one has a Schedule D for investments, the foreign income is used with the US spouse’s income (all the worldwide income)  when determining the amount/percentage  of capital gains taxed. I’m not going into deep details of this because you may not even have capital gains. But tax for these situations, with a form 2555 and a Schedule D, go through the hierarchy of Qualified Dividends and Capital Gains Worksheet, then the Foreign Earned Tax Worksheet to determine you tax bill. You can see those worksheets on page 35 and 36 of the 1040 Instructions. Do note the footnote instructions for the foreign income tax calculation worksheet.  BUT it will scramble your brains trying to get your head around it. The best way is let TurboTax do all the figuring and mathematical gymnastics of those worksheets and figure your tax in an instant. 
 

But still with all the convoluted instructions (eliminated if you let TurboTax do it’s thing) you will still save money filing a joint return. You can do two returns, with the American filing separately and no foreign income reported just to check out your specific situation. Then compare Line 24 Total Tax on both returns.  Use the filing that has the lowest total tax.

Thank you. This is exactly what I meant and it has been a frustrating process to learn that FEIE (full amount) would effectively wipe out the tax from the 10-12% brackets only. Having said that, I was surprised that TurboTax can handle this correctly. All the payroll withholdings are off by a mile this year, since foreign income gets added to the yearly earnings (when you return midway through the year).... which partially (or fully depending on amounts) gets taken out by FEIE at 10-12%, so then income starts being taxed at a higher rate.

 

Whatever the case may be, I ran the numbers in excel and MFJ is still superior. I am laughing at your second comment regarding capital gains... That is for another day.

Edited January 31, 2022 by analitikas

[Wuozopo 4,293]

1 hour ago, analitikas said:

Having said that, I was surprised that TurboTax can handle this correctly.

We purchaseTurboTax Deluxe for $30 and it will handle FEIE, big capital gains/dividends, a small business (self-employment), IRA distribution, pension income, and Social Security retirement with ease. And you can easily do as many different tax scenarios you want by saving each under a different file name. My American wife could seriously do a tax return with a pencil/eraser, calculator, and the IRS instructions to the 1040 and all the required forms/schedules, but why bother doing all that when every single tax rule we need is programmed into even the cheap version of TurboTax. 

 

1 hour ago, analitikas said:

it has been a frustrating process to learn that FEIE (full amount) would effectively wipe out the tax from the 10-12% brackets only.

My wife is similar. The first year we were married and reported my 8 months of foreign income, she was looking at the TurboTax forms and wanting to know exactly where those numbers were coming from noticing that my income wasn’t “erased” at all.  Here’s a tip from her you might find useful for your inquiring mind. It works on an installed version (not sure about online).  In the tax form view, you can right click a number and it will tell you where they got that number…if it came from another form or a tax worksheet for example. 

 

Edit to add: I may get back to your original post with some comments but that is for another time. 

Edited January 31, 2022 by Wuozopo