FEIC and Green Card

I'm a little confused as I don't know what you are trying to accomplish nor what tax year you are asking about. That said: In order for a resident alien of the US to be eligible for the foreign income & housing exclusion, the taxpayer would first have to show that their tax home is in a foreign country. Let's just assume for a moment that your wife is a US resident alien. She lives in Canada and earns her livelihood there. Canada is her tax home. To be eligible for the exclusion she would now have to pass either the bona fide resident test or the physical presence test. You tell us that she fails the physical presence test because she can't meet the 330 days of residence in Canada. Unless she can show that she has been in Canada for an uninterrupted period of 365 days, she also fails the bona fide resident test. Based on the facts presented, she appears to fail both "tax" tests. Therefore, if she was a US resident alien for tax purposes, she would not be able to exclude her foreign earned income from her US tax return. She would have to use the foreign tax credit to avoid double taxation on her Canadian income.

There are three ways she could be a US resident alien for tax purposes:

1. She is a lawful permanent resident of the US (she has her green card).
2. She passes the substantial presence test. This test looks at 3 years of physical presence in the US, counting all days in the current tax year (assuming she has at least 31), 1/3 of the prior year days and 1/6 of the days in the year before the prior year. The total must be at least 183 days.
3. She is married to a US citizen or a US resident alien at the end of the year, and they both make an election to treat her as a resident alien of the US.

I'll pass on any issues you may have with USCIS as I am not familiar with the requirements to obtain lawful permanent residency in the US.

The main focus of this post is to get opinions from tax practitioners who have clients in a similar situation and happen to know how they have managed the issues of having one foot in two countries at the same time. It's not purely a tax question.

To clarify the facts however:

1) My wife has been a resident and citizen of Canada for 12 years. She owns a home there and works there. She has no income in the USA. 2) She visits the USA 15-20 times a year and spends about 60-70 days here. 3) We expect her to get her green card either late in 2011 or early in 2012.

I'm not sure what you meant by "show she has been in Canada for an uninterupted period of 365 days." If that means that she was physically in Canada for 365 days without leaving, she would not meet that test. If that means that she had her primary home in Canada and went to work in Canada 5 days a week, and those conditions had exisited for 365 consecutive days, she would meet that test.

There are many situations where the IRS takes one position and other civil authorities take another. For example, suppose your kids live in New York in a home you own there, you are licensed to drive there, you vote there, you come home there every weekend, but you have an apartment in Ohio and go to Ohio every week to work. The IRS will say that Ohio is your tax home, but New York is not going to say "Because the IRS says Ohio is your tax home, you cannot vote here or send your kids to school here." (And New York will of course want to tax you as a resident, but we're talking about the feds here, not states.) I'm trying to find out if anyone has experience with people with a tax home in another country but who are claiming the USA as their legal home for residency.

I can't address the non-tax issues. Based on the facts presented, your wife is a resident of Canada. Canada is her tax home. She is not a resident alien of the US using the green card test or the substantial presence test. Unless you both elect to treat her as a US resident, she is a nonresident alien (NRA) of the US. You state she has no US income. As such, she has no US tax liability. As an NRA, you can not file a joint US tax return. Assuming you have no other eligible person that could qualify you as head of household, you would file as married separate in the US. As she has no US income you could claim a personal exemption for her as long as she has an ITIN. (I assume she has no US SSN.) She would file her own Canadian tax return. There would not be any double taxation.

If you elect to treat her as a resident alien or she becomes a lawful permanent resident of the US, you both could file a US joint return that would include your combined worldwide income. You can't use the foreign earned income exclusion until she can pass either the physical presence test or the bona fide resident of Canada test. These are US tests and have nothing to do with Canadian law. Based on the facts you present, she would be considered a bona fide resident of Canada as long as her trips to the US are for vacation or business and she returns to Canada when vacation or business ends. (See below for the IRS Pub 54 info.)) As a bona fide resident of Canada for US tax purposes, and assuming you made the election to treat her as a resident alien of the US or she becomes a lawful permanent resident of the US, you could use the foreign earned exclusion on your joint US tax return. Below is the definition of the bona fide resident test from IRS Pub 54:

To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an en- tire tax year. An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year ba- sis. During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country.

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Thank you. I plan to treat her as a resident alien even before she gets her green card, because the cost of MFS vs. MFJ would be very substantial, and I'm pretty sure that the FEIC or FTC would negate any tax on her income. Also, since she owns a home in Canada, I am pretty sure we can deduct her mortgage interest and property taxes.

There's no question she can meet the bona fide test.

But the focus of my question was in fact the non-tax issues.

I will just have to do our taxes and see whether the FTC or FEIC is more beneficial.