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December 2, 2014 - Phil Hodgen

Give up green card, make an election to file a joint tax return

This Week

Hello from Seat 12B on AC790: Los Angeles to Toronto. Middle seat yay. Sunday morning.

For a good Sunday song, go find Kris Kristofferson's "Sunday Morning Coming Down" and take a listen. Bonus points for finding the version with Steve Earle. (YouTube). There are other versions, but that's the one I like. The song is a master's view into a parallel universe that exists right beside you.

Ummm, well actually this email was written on the plane but edited in the Hyatt Regency in Toronto on King Street on Sunday night. Earlier this evening I was at St. Michael's College with John Richardson for a couple of hours talking to people about expatriation, tax, and all that fun stuff.

Today's question comes from Ann:

I'm a green card holder for over 9 years already (starting from year 2006 date count) and I want to expatriate on 2015 because my husband (American citizen) and I plan to move to my country (country removed) by 2015.

The tricky part for me to handle this matter is the IRS filing status. I want to expatriate next year 2015 hopefully from my green card residency, but my husband will remain as an American citizen. How will I fill up the IRS tax form filing status? Will it be "married filing jointly" or "married filing separately"?

I'm planning to choose or opt for "married filing jointly" because of tax savings advantage on my part considering I only earn around $12,000 in a year and also my husband and I have been filing joint income tax returns from the start of our marriage in the United States. I need your advice or suggestions on this matter on what to do, so I can start planning now and the next year to avoid any hassles when the time is near.

Short answer, Ann? When you expatriate and remain married to a U.S. citizen, you have two choices for filing status in that final year of holding the green card:

  • You can file "married filing separately" or
  • you can elect to become a U.S. taxpayer again — after having terminated your U.S. taxpayer status when you gave up your green card.

Default Rules for Filing Status

Ann needs to know what filing status she should use in 2015. Her objective is to throw her $12,000 income in with her husband on a joint tax return in order to save tax.

The filing status choices for Ann are pretty simple. She looks at her status as a U.S. taxpayer on December 31, 2015 and if it is "nonresident alien" she must file Form 1040NR. Ann's status will be "nonresident alien" because she is not a U.S. citizen and she will be a nonresident because she gave up her green card.

Her husband, as a U.S. citizen, cannot file a nonresident income tax return. He must file Form 1040.

This means it is impossible for Ann to file "Married Filing Jointly" with her husband. Under the default rules, that is. But there are workarounds.

How Ann Can File MFJ: Count the Days

This is tax. There is (almost) always a work-around to a tax law. Here are two ways that Ann can achieve her goal to file a joint income tax return with her husband in 2015.

The first is based on the number of days she spends in the United States. This is something I do not know about Ann.

But if she spends so much time in the United States in 2015 that she satisfies the "substantial presence test" then she can be treated as a "resident alien" in 2015. If she is a "resident alien" then she files Form 1040, not the nonresident's tax return (Form 1040NR). If she is a resident alien, she can file jointly with her husband for 2015.

How Ann Can File MFJ: Elect Back Into the System

The second way Ann can file a joint tax return with her U.S. citizen husband in 2015 (after giving up her green card) is by special election. A nonresident alien spouse can file an election to be treated as a U.S. taxpayer filing a joint tax return with a U.S. citizen spouse. For your reading pleasure, Internal Revenue Code Section 6013(g)(1) through (3) says:

(1) In general

A nonresident alien individual with respect to whom this subsection is in effect for the taxable year shall be treated as a resident of the United States—

(A) for purposes of chapter 1 for all of such taxable year, and

(B) for purposes of chapter 24 (relating to wage withholding) for payments of wages made during such taxable year.

(2) Individuals with respect to whom this subsection is in effect

This subsection shall be in effect with respect to any individual who, at the close of the taxable year for which an election under this subsection was made, was a nonresident alien individual married to a citizen or resident of the United States, if both of them made such election to have the benefits of this subsection apply to them.

(3) Duration of election

An election under this subsection shall apply to the taxable year for which made and to all subsequent taxable years until terminated under paragraph (4) or (5); except that any such election shall not apply for any taxable year if neither spouse is a citizen or resident of the United States at any time during such year.

This is done by attaching a statement to the income tax return. Both spouses must consent to this election.

This is a seemingly counter-intuitive move. When Ann gives up her green card, she will cease being a U.S. taxpayer (she no longer satisfies the definition of "resident" because she no longer holds the magic visa status).

She just jumped out of the frying pan. Why would she immediately jump into the fire by electing to re-enter the U.S. tax system, fully taxable on her worldwide income?

We do this for people all the time. Well, not all the time. We do it when the tax results make it a good idea. "A good idea" means situations like this: where the expected tax liability will be less by filing a joint tax return. It also includes situations where a U.S. citizen spouse is transferring assets with his or her noncitizen spouse. This can inadvertently trigger capital gain tax (see Internal Revenue Code Section 1041(b) to see how this can happen).

The election is pretty easy to terminate, when Ann wants to stop being a U.S. taxpayer. Internal Revenue Code Section 6013(g)(4)(A) gives an easy way to do it: either Ann or her husband can revoke the election.

Usually we have a specific reason we use an election like this in an expatriation. We leave the election in place for one year, then revoke it for the following tax year. Note that a married couple can only use this election once. Internal Revenue Code Section 6013(g)(6) says:

If any election under this subsection for any two individuals is terminated under paragraph (4) or (5) for any taxable year, such two individuals shall be ineligible to make an election under this subsection for any subsequent taxable year.

Since you only have one bullet, you want to use it wisely. πŸ™‚

Ann's Task

Here is what Ann should do:

  • Compute the total U.S. income tax payable for 2015 (for herself and her husband) if she and her husband file "Married Filing Separately". Remember, Ann, this means that all of the income you earn in the your new country of residence after you give up your green card will be completely non-taxable in the United States.
  • Compute the total U.S. income tax payable for 2015 if she and her husband file "Married Filing Jointly". This option means all of Ann's income for the entire year–before and after she gave up the green card–will be taxable.
  • Find out if she qualifies under the "substantial presence test" to be a resident taxpayer for 2015; if so, file a joint tax return. I would recommend a statement attached to the tax return because the IRS will have Form 8854 and a joint tax return in the system and that might cause its computer to cough up a giant hairball of WTF.
  • If the substantial presence test doesn't apply, or if the election method is useful for other reasons (perhaps proactive hairball prevention is one such reason), consider filing the election for a nonresident alien spouse (Ann) to file as a resident taxpayer on a joint tax return with her husband using the Internal Revenue Code Section 6013(h) method.

Don't forget all the other fun tax forms that you have to file under both strategies, Ann. Form 8938, etc. Your husband, too. Make sure he files everything he should.

Expatriation