Valentine’s Day is here, and love is in the air. If you’re anything like me, there’s only one thing on your mind: taxes. OK, maybe you aren’t thinking about taxes when you spend time with your Valentine in Costa Rica – but if you see wedding bells in your future, the U.S. tax implications should at least be considered.
The first thing any U.S. citizen or foreigner needs to know is that getting married will change your filing status, and your filing status can make a big difference on how your tax profile looks at the end of the year.
Some U.S. citizens believe that if they marry a non-resident of the U.S. outside of the country that the marriage doesn’t count for tax purposes, and they can continue to file taxes as a single filer. This is not correct. Generally, married people must file either jointly or as married filing separately. Each has advantages and disadvantages.
Advantages and disadvantages of filing jointly
If your spouse has no income or very little income, the married filing jointly status can help lower your tax bill. However, it can often be a headache to use. Before you jointly file, your spouse must obtain an Individual Taxpayer Identification Number (ITIN). Getting the ITIN involves sending the IRS original or certified copies of foreign identification and citizenship, typically a passport. Getting these certified copies is easier said than done.
The IRS will tell you that the U.S. Embassy will certify the documents. Depending on the day you go and the representative you see, the embassy may tell you differently. You can have the documents certified by the issuing agency, but in Costa Rica that’s even more difficult.
If you manage to get the certified copies or decide to send originals, you still may have to wait several months for an answer. If the IRS rejects the application for any reason, it cannot be amended or appealed. You have to start over from the beginning.
Advantages and disadvantages of filing separately
If you marry a Costa Rican or other foreign national and choose to file your taxes as a married couple filing jointly, you will subject the foreign spouse’s income to U.S. taxation as though he or she were a resident of the United States. This will include income from employment, pensions, rental, or any other source, no matter where he or she earns it. If you marry a Costa Rican with significant income, you may find the joint filing status disadvantageous from a U.S. tax perspective.
If your spouse has income and you do not want to pay tax to the United States on this income, you may want to use the married filing separately status. This will often allow you to avoid the headache of getting an ITIN for your spouse as well. However, it is likewise fraught with disadvantages. Using this status can be costly.
Tax rates are higher for this status, especially at higher income levels. With the married couple filing separately status, you lose some tax benefits such as the earned income credit or education tax credits.
Most importantly for many retirees, the formula for taxing Social Security benefits becomes much less generous under this status. A retiree filing separately from a spouse might have $2,000-3,000 or more in additional tax on their Social Security benefits over what a joint filer or single filer might have.
I wish the options for a U.S. citizen married to a non-resident alien were better. Perhaps when gift shopping this year, opt for chocolate over a ring.
Ross Lustman is an attorney and enrolled tax agent with U.S. Tax and Accounting, S.A.
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