If you are not a US citizen, you are considered a nonresident alien for tax purposes unless you are able to pass the substantial presence test or the green card test. However, in some cases nonresident aliens can circumvent the results of the green card and substantial presence tests by making their own alien tax status determinations. If you are a nonresident alien when the tax year ends, but your spouse is a resident alien or a US citizen (or vice versa), you may be interested in electing to be treated as a US resident for tax purposes.
What Are the Tax Consequences of Treating a Nonresident Alien as a US Resident?
Before we discuss Internal Revenue Service criteria for treating a nonresident alien as a US resident, let’s go over some of the tax implications of making such a decision:
- You and your spouse will both be treated as US residents for all years during which you choose to be treated as a resident (unless you suspend or end the decision, which we will discuss shortly).
- Even if you choose to be treated as a resident, you can still choose to be treated as a nonresident with regard to Social Security tax and Medicare tax withholdings under certain circumstances.
- You and your spouse will be required to file a joint return. You will lose the option to file separately.
- In most cases, you and your spouse will be unable to claim tax treaty benefits during the years the nonresident is treated as a resident. However, there are a few limited exceptions to this rule.
- You and your spouse will both be required to report all of your worldwide income on your joint return.
- Failure to disclose global income to the IRS may result in the imposition of substantial penalties. FATCA, or the Foreign Account Tax Compliance Act, requires taxpayers to report foreign assets and income whose values exceed certain thresholds. For instance, failure to file Form 8938 (Statement of Specified Foreign Financial Assets) can result in penalties ranging from $10,000 to $50,000 per violation.
- In addition to filing Form 8938, you may also be required to file an FBAR (Report of Foreign Bank and Financial Accounts) depending on several factors. Again, penalties for noncompliance are harsh: up to $100,000 per willful violation, or 50% of the foreign account balance (whichever is greater).
- Please be advised that willful violations of the Internal Revenue Code can lead to criminal prosecution – especially in cases where taxpayers attempt to conceal income or assets with foreign banks. The IRS works closely with the Department of Justice (DOJ) to prosecute suspected tax criminals.
Depending on your unique financial circumstances, treating a nonresident alien as a resident may or may not be favorable choice. An experienced CPA can help you determine the best course of action for your family.
Making or Ending the Choice: How to Notify the IRS
The IRS can’t read your mind. When establishing the decision for a nonresident alien to be treated as a resident, you’ll need to submit certain documentation.
Initiating the decision is fairly simple. When you file your joint tax return, you should attach the following two items:
- Contact information for you and your spouse, including your full names, addresses, and Social Security Numbers (SSNs) or Employer Identification Numbers (EINs).
- A formal statement confirming that:
- On the final day of the tax year, one spouse was a US citizen or resident alien, and one spouse was a nonresident alien.
- The nonresident spouse is electing to be treated as a resident for the full duration of the tax year.
Filing a joint return from the outset is typically the simplest way to accomplish this. While the IRS will accept a joint amended return (Form 1040X, Amended US Individual Income Tax Return), you will then have to amend any other returns which were filed after the year to which the decision is applicable.
Once you make the decision, you cannot go back unless you suspend the decision, which occurs when neither of you are a resident alien or US citizen during the tax year. You will not be permitted to make the choice again if the decision is terminated for any of the following reasons:
- You and your spouse are separated or divorced.
- You and your spouse fail to supply records requested by the IRS.
- You or your spouse decides to revoke the decision.
- Either spouse passes away.
If you and your husband or wife have any questions about your tax liabilities or tax resident status, it’s important to address the issue before penalties are imposed. To set up a completely confidential consultation with CPA Ted Kleinman, call US Tax Help at (541) 923-0903.