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Couples with NRA spouses have to choose - file jointly and lose stimulus eligibility or file separately and possibly pay higher tax

Couples with NRA spouses have to choose - file jointly and lose stimulus eligibility or file separately and possibly pay higher tax
Ines Zemelman, EA
29 April 2020

Stimulus Payment Critical Update for Non-Resident Alien Spouses

The IRS updated the Stimulus check FAQ page with more information on COVID-19 Federal Stimulus Payment eligibility.

Couples filing jointly where one of the spouses is a non-resident alien with ITIN or Social Security number stamped “Not valid for employment” ARE NOT ELIGIBLE. The entire family is ineligible, not just the spouse without valid SS#  (FAQ 13)

The exception is given to the families where either spouse was a member of the US Army at any time during the taxable year.

Whom this concerns

Families where one spouse is a US citizen or GC holder and the second is a non-resident alien. 

Within this subset, those who file Married Filing Jointly (MFJ), electing to treat the NRA spouse as a US resident for tax purposes in order to benefit from lower tax rates, are deemed ineligible for the US Stimulus Payments (barring one of the spouses serving in the US Army).

This election (treating NRA spouse as US citizen for tax purposes) remains in force until either spouse dies, divorces, or revokes the election. The revocation can be either explicit -- this involves submitting a separate statement of revocation -- or by implicit revocation. Implicit revocation means failure to file a tax return by either spouse for any tax year. Following revocation, the couple will not be allowed to make the election again (ie - they will not be able to file jointly)

How to proceed

The IRS FAQ13 suggests to file two separate returns (married filing separately).

If spouses file separately, the spouse who has an SSN may qualify for a Stimulus Payment; the other spouse without a valid SSN will not qualify.

By filing separately, the US spouse (and dependents, if any) will qualify for a stimulus check,  - provided they meet income thresholds ($99K if filed separately vs $198K if filed jointly). 

If you fall under this category, which option should you choose for the 2019 tax year?

  1. Continue filing jointly and give up stimulus payment

  2. File two tax returns separately for the 2019 tax year; claim the dependent children on the US spouse's tax return and receive a stimulus check up to $1,200 + $500 per eligible child. 

Head of household is not an option

The option of filing as a Head of Household, where income threshold is $112K is not considered because the other spouse (NRA) will not be able to file as Married Filing Separately (MFS), thus their election to be treated as a US person will be revoked forever (see implicit revocation above).

The factors to take into consideration to choose between (1) and (2) are as follows:

  • Income qualification of the US spouse (adjusted gross income below $99K). 

  • Number of qualifying dependent children below 17 years old

  • Combined tax due from two tax returns filed separately under higher tax rates, versus one joint return with lower tax rates

What does Adjusted Gross Income (AGI) refer to?

The eligibility factor for the stimulus payments is Adjusted Gross Income (AGI). For many IRS calculations, MAGI is used, because AGI can be artifically low (examples below). It is not known yet whether the Foreign Earned Income Exclusion (FEIE) is added back for calculation of the stimulus payment qualification or not. The IRS has not given a ruling on this, and all communications in the Treasury bills refer solely to AGI.

Example 1 - Stimulus Advised


John and Mary live in UAE (no income tax). John is a US citizen with a salary of $130K. Mary is a homemaker. They have a 5-year old son.  No other income. 

Filing jointly they do not owe tax but cannot get a stimulus payment because Mary is a nonresident alien (NRA). If they file separately, John’s federal tax is $856 , but he is eligible of stimulus payment of $1,700 for himself and the child. 

Here comes the caveat. It is not known yet whether the foreign earned income exclusion is added back for calculation of the stimulus payment qualification or not. Line 8b in John’s tax return shows Adjusted Gross income of $24,100 after the foreign earned income exclusion. Based on that number, John qualifies. However, if the foreign earned income exclusion is added back, it would be $130K - far above the income threshold for the stimulus payment. We will update this article once the IRS clarifies its position. 

 

Example 2 - Stimulus Not Advised 

Peter and Helen are retirees living on fixed income. Peter receives a US pension of $47K, Helen receives French Social Security benefits which, by virtue of the Tax Treaty, and provided the return is prepared correctly, are not taxable in the US. They recently bought a rental property and can deduct rental loss of $20K on their tax return filed jointly. The loss brings their taxable income to zero.

Rental loss is not allowed for the status ‘married filing separately’. If filing separately, Peter’s taxable income will be $20K higher than if filed jointly. He will receive a stimulus check of $1,200, far below the tax of $3,829 he would owe if he chose filing separately.

Ines Zemelman, EA
founder of Taxes for Expats