Ending election to Treat Nonres. Alien Spouse as Resident

[backcountry]

I am a dual citizen and my wife is a Canadian citizen and we live in Canada. For my first US tax return as a resident of Canada we made the election to treat her as a US resident for tax purposes and have filed joint returns for 15 years. I am now wondering if it makes sense to revoke this election for 2011 and future tax years.

I recognize that this revocation would be permanent. Aside from me having to file "married filing separately" and having narrower tax brackets what are the other formalities and consequences?

We have some FTC carryforwards. Would I get to keep all of these?

Is there any tax consequence for her, like an exit tax?

We own a house and claim property taxes and mortgage interest on Schedule A. Would I continue to be able to claim these or only half of these?

Aside from the house we do not own any assets jointly. What I am aiming to do is free her to invest in Canadian mutual funds without having to worry about PFICs and allow her to open a TFSA without having to worry about foreign trust reporting.

[nelsona]

First off , a comment about the "irrevocability" of ending the election.

As a Cdn resident, your spouse was allowed -- by treaty -- to join you on your return at any time. No election ever had to be made, and no election need be made now.

So, if you decide year-by-year to file jointly or not, that is your (or in actuality, her) right.

So, if she decides not to join you this year, it is not irrevocble.

There was proabaly never nay need to file jointly to reduce your US tax to NIL, so there is no benefit now. Just make sure you get any child tax credit if applicable.

FTC' would need to be split out for future use.

As to any deductions, do you really need these? Unless you have US-source income, your US tax should be zero even using standard deduction.

[backcountry]

Thanks for your reply, nelsona.

Can you point me to the section in the treaty that addresses this? I am aware of Article XXV Paragraph 3 which provides MFJ rates for non-US citizens working in the US, but that doesn't apply to me because I am a citizen or to her because she doesn't work in the US.

Would the FTC carryforwards just be divided in half or would I need to apportion them based on the amount of Canadian tax we each paid that generated the carryforwards?

We do have a substantial amount of US source income -- dividends and capital gains from US stocks and occasionally some employment income from a few days working in the US which I can't exclude on Form 2555. But through the resourcing provisions I have generally been able to reduce US tax to zero.

However, a couple situations come to mind where it would be more difficult to reduce US tax to zero. One is short term capital gains which are taxed at a higher rate in the US than in Canada. Another is capital gains where the gain in US dollars is large because of the appreciation of the Canadian dollar but which might only be a small gain or even a loss in Canada.

In either of these situations it could help to have wider brackets and the Schedule A deductions to reduce the taxable income in the US.

Of course I can run the numbers for MFJ or MFS and see if it makes a difference. I'm interested in your guidance on the procedural aspects. Can I just file MFS and she doesn't file at all? And then in a future year where it helps we file MFJ? Are there any formalities to it like additional forms or statements so that her not filing in a particular year doesn't raise a flag at the IRS?

[nelsona]

XXV(1). Cdns shall not be subject to any requirement that is more burdensome than an american in the same situation.

If your spouse was american, she could join you (or not) on your return any year she wishes, without any formal election, thus So does your Cdn wife.


I might, either in the first year you drop the election (which, as I said need never have been made), or in the first year in the future in which she rejoins you, file an 8833 to explain this.

As to FTC splitting when moving to/from MFS/MFJ, refer to the IRS FTC publication which has detailed examples.

While you may "envision" some situations, I'm quite sure that in your 15 years there have been no instances in which, if done correctly, you had any tax to pay in US, that would not be fully credited on your CDn return, by filing MFS.

[backcountry]

Thanks again.

Before my first post, I reviewed Pub. 54 and Pub. 519 which both have a very brief section called "Ending the Choice" that says "If the choice is ended in one of the following ways [revocation], neither spouse can make this choice in any later tax year."

I assume that this is the general case and you are pointing out that the treaty overrides the code?

Then when would it ever be beneficial to to keep my non-US citizen wife on my return?

If there is no reason, then I'm inclined to file MFS and she will not file a US return at all since she (we) are residents of Canada. That would reduce the reporting burden which seems to grow by the year.

[nelsona]

519 hardly ever applies to Cdns.

the only pssible benefyt in filing with spouse is (as youalluded) to build up inused passive FTC for those siyuations you describe. But at what cost?

Better to file MFS (you still get an exempyion for her and kids); If you have kids you do also want to get the child tax credit.

[backcountry]

This has been helpful. I plan to file MFS and my wife will not file at all since she is a NRA.

Thanks for the advice on spitting the FTC. I can figure those out by studying the examples in Publication 514.

The remaining thing to figure out is itemized deductions. Since I do have a large amount of US dividends, it looks like it would be beneficial to itemize. We jointly own a house. Since my wife will not be filing a return, can I claim all of the property tax and mortgage interest on Schedule A or can I claim only half or do I need to track down which one of us actually paid it?