Does my wife need to file US taxes?

[bpc2509]

Hi,

I am currently on a TN visa working in the US since 2009. My wife and I were married in Canada in September 2012 and she moved to US shortly thereafter on a TN dependent visa. She doesn't pass the substantial presence test and is considered non-resident alien for 2012. For 2012 she was a student and earned about 18,000 on a student grant. i believe my two options would be to:

1) File married jointly and consider her a resident alien for tax purposes. She would obtain an ITIN and we would declare my income and her income as worldwide income. She would also file her CAD taxes as normal as well.

2) File married separately. I would file my taxes as I have been for the past 3 years and she would not need to file a US return since she is non-resident alien and has no US source income. She would then file her Canadian taxes separately as normal as well.

Am I correct in these two situations? I think situation 1 is more beneficial but situation 2 is simpler and would not require obtaining an ITIN which at this time means sending in her passport for verification.

Cheers and thanks for any input.

[nelsona]

First off, she should not be filing "as normal" in canada. She has left and should file a departure return, following the Emigrants guide from CRA, witha departure date on her final Cdn return.

For US, she (and you) have a choice,.

Genarally, you should file jointly, reporting world income, togther. This will ower YOUR taxrate, and she should be able to either exclude her Cdn wages (by form 2555) and.or take credit for any Cdn tax she pays, by form 1116.

There are many posts on this subjkect.

You can't file as you have in the past, because you were single then, but now you are moarried. Filing married separetly is usually higher taxed.

[bpc2509]

Thank you for the very helpful information Nelson. As her grant for her PhD was tax exempt, I would need to exclude the amount (form 2555) as she has no tax paid for which to take credit.

[nelsona]

correct.

[rlb]

Was her PhD grant then given to her in Canada for a Canadian University? You should note that PhD grants in a foreign country (foreign to the US), even when tax free in that country, may be taxable by the US, at least if she is filing a 1040 for that year. My daughter is in this situation in Australia - the PhD scholarship is tax free in Australia but taxable by the US. You need to read the docs on taxation of scholarships. Generally anything which goes toward tuition is tax-free but anything which goes toward living expenses is taxable and also not excludable via form 2555. In my daughter's case, she has to pay tax on the scholarship part, but on form 2555 can exclude additional income earned for teaching classes (the latter though is then taxed by Australia).

[nelsona]

rlb, that is what our poster is saying. he needs to exclude the income, since there is no Cdn tax to write off the US tax -- meaning its taxable in US.

[bpc2509]

I'm a bit confused as to what rlb was saying. Her PhD grant was from a Canadian University. The income she made will be declared on our joint tax return as total worldwide income. That would be subject to taxation but I am using form 2555 to specifically exclude what she made whilst in Canada. In pub 54, it says that "any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income." I think that should mean I should be able to exclude the whole amount since the grant was for research and not just part of the amount since I am listing it as part of gross income. From what I read of your response, I cannot exclude the whole amount?

As an aside, should she be using the bona fide residence test or physical presence test on form 2555? She qualifies under both since she is Canadian citizen and has been living there continuously since 2004. Is there any preference to either case?

[rlb]

Income excludable via form 2555 involves personal services income. If she performed services for the benefit of the university, such as teaching or research, then it is earned income. If part of it is for her support while she studies for degree, for example attends classes, studies, etc., then that part is not. I have been conservative on behalf of my daughter, not excluding any of her payments from the university except those paid directly for teaching classes. But I am not an authority, and I would think research leading to a PhD thesis might be a borderline case. The key seems to be whether the research is primarily for the benefit of the institution (like a post-doc would be, for example), or for the individual, such as research leading to a PhD thesis, which is scholarship income. The former is personal services income, which you can exclude via form 2555; the latter is taxable unless it is applied to tuition, books, etc.

You might find the IRS discussion on how to treat a Fulbright Grant to be worth looking at. See http://www.irs.gov/Individuals/Internat ... ght-Grants. Also Publication 54.

But as I said, I am only a dad who researched this for his daughter. Perhaps nelsona has a more authoritative opinion.

[rlb]

You need to take the period (".") off the link I gave. Try this:

http://www.irs.gov/Individuals/Internat ... ght-Grants

[nelsona]

The point of this thread was to determine if the spouse needed to file, and how best to file. Period.

My suggestion was to file jojtly full-year, using 2555 qnd/or 1116 to reduce the US tax that would be incurred by reporting her Cdn income, while reducing his US taxrate.

Of course, to use 2555, both the income must be eligible earned income, and the required number of days outside US must be met.

Any income that does not meet these requirement -- and its associated Cdn tax -- can still be used to lower the US tax bill.

I'll let you guys figure out what portion of the grant was considered earned income, and. more importantly, if she even qualifies to use 2555 in the first place.