I have posted in this group about tax implications of marrying a foreigner - we did get married last month.
Is anyone aware of resources written that a mere human being can understand that can explain to me how to calculate my USA taxes with an alien spouse?
I do understand - that we can elect to treat her as a resident alien and file jointly, that there is a "Foreign Tax Credit" and "Foreign Earned Income Exclusion." I'm pretty confused over itemized deductions, and how to figure out whether to use the FTC or FEIE.
I've found various IRS publications on their website, but I can't really make sense of them, and obviously I'm not stupid when it comes to taxes.
Can anybody make a recommentation of where to look?
I do not have a reference that I can think of to recommend to you, but I will look around and see what I can find. If I find something I'll post it here sometime this week.
However -
Being married means you can file Jointly or Separately with your spouse. If you file jointly you are taxed on your WORLD WIDE income from both of you.
You mention the Foreign Tax Credit - this is available for taxes you pay on income that you must also pay U. S. taxes on. You can claim a credit for these on your U. S. return. There are limitations - oversimplified, you get a credit for the lesser of the taxes you actually paid to a foreign government which is also taxed by the U. S. OR the amount of U. S. tax due on that income, whichever is less.
You mention the Foreign Earned Income Exclusion - this is available to U. S. Taxpayer who LIVE and work overseas for a specified number of days. IF you meet either the Bona Fide Presence Test or the Physical Presence Test you can exclude some income from U. S. Taxation. BUT you have to be out of the country about 300 consecutive days to qualify - those days can span 2 calendar years, in which case you have to pro rate the income earned.
For example, if you worked in Dubai from July 1, 2005 through June 30 2006 you'd qualify. But you'd only get to exclude 50% of your income, up to a max of 50% of the FEIE, in each year.
I mention this because you talked about your spouse being a Resident Alien. As a resident alien I don't see how she could qualify for the FEIE - if she lived and worked here there is no foreign income.
Katie from San Diego is our resident Foreign Income Expert, as I recall. I would defer any of my comments to her. I'd follow her advice on this before I'd follow my own, I do very little of this type of work.
My wife works in Canada and has no income here. I was contemplating treating her as a resident alien for tax purposes so that I wouldn't have to file married filing separately. She is not out of the country
300 consecutive days, because she visits here 2-4 weekends a month and spends holidays here. But she legitimately lives in Canada, no one will be able to argue that she doesn't. (Of course I realize that just because she really lives in Canada doesn't mean she "really lives in Canada for FEIE purposes.")
I was only able to find reference to a 330 day rule, not 300 day rule. The 330 days do not have to be consecutive. So if over a year she spends weekends and holidays in the US, she might be in Canada for only 200 days. So I supposed the foreign earned income exclusion will be 200/365 times $91,500. But then again, as 200 is less than 330, maybe you don't get any foreign earned income exclusion.
Foreign Earned Income Exclusion - Physical Presence Test
You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and resident aliens.
The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. However, your intentions with regard to the nature and purpose of your stay abroad are relevant in determining whether you meet the tax home test explained under Tax Home in Foreign Country in Publication 54.
330 Full Days
Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during the 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation time.
You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. Also, if you are present in a foreign country in violation of U.S. law, you will not be treated as physically present in a foreign country while you were in violation of the law. Income that you earn from source within such a country for services performed during a period of violation does not qualify as foreign earned income.
However, the minimum time requirement can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions, and that you had a tax home in the foreign country and were a bona fide resident of, or physically present in, the foreign country on or before the beginning date of the waiver.
Also, you can take a credit on your US tax return for taxes paid to Canada. But I don't know how provincial and state taxes would work. What is the US state that you live in? And what is the Canadian province?
There is also a bona fide residence test, in addition to the physical presence test. You have to be a bona fide resident for the entire tax year.
I'm not concerned about her qualifying as a bona fide resident of Canada. She's a Canadian citizen, has a full-time job there, owns a home, and has lived there for something like 12 years.
But I have received conflicting advice in this group in the past as to whether the FTC or FEIE is better. And I'm still puzzled about how her itemized deductions roll into our tax return. I'm hoping (but not counting on) her Ontario provincial income taxes will be deductible, and I'm pretty sure there is some benefit to her mortgage interest. I recall seeing a worksheet somewhere though that indicated that the mortgage interest would be pro-rated according to income - that if her income was 30% of our combined total, we could deduct only 30% of the mortgage interest.
I think you also need to explore the possibility that you must also file a Canadian tax return. As you are married to a Canadian resident, you are also deemed resident of Canada.
One of the reasons for conflicting information is that the rules for the FEIE changed a few years ago (and not for the better). Your wife should qualify as a bona fide resident of Canada no matter how much time she spends in the USA, as long as she doesn't take steps to relinquish it, based on some old court cases I saw recently, when I was researching it for a client. As to whether you would need to file in Canada, it may not be necessary, unless you also had income there. In Canada, each person files his/her own return; they don't have a joint filing status. I prepared a T1 return for one of my clients who had Canadian income while a bona fide resident of a South American country. The treaty between that country and Canada made the income taxable; but had my client been resident in the USA, it would not have been.
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