This post is a continuation of my post (referenced in the above tweet) which describes the reduction of the threshold for Married Filing Separately from $4050 to $5. In this post I describe why I believe that this change will result in further renunciations of U.S. citizenship. The primary incentive to renouncing citizenship is that: by requiring married low income Americans abroad to file U.S. tax returns, more financial information about their nonresident alien spouses will be reported to the IRS. On the most basic level, a Form 8938 is required only if a U.S. tax return is also required. The requirement to file a tax return increases the chances of a requirement to file Form 8938 (and others). Form 8938 does require the disclosure of some jointly owned assets. If you were a nonresident alien, would you want your financial information to be transferred to the IRS?
On December 19, 2018 Dr. Karen Alpert commenting on changes to the 2017 TCJA that would affect Americans abroad noted that:
Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join me on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:
You are invited to submit your questions in advance.
And now, back to our regularly scheduled programming.
I begin with the conclusion …
The Every Day facts:
1. A U.S. citizen living in Canada Is married to an alien (the nonresident type)
2. Had $500 of part time employment income
3. Because she is married (in accordance with the definition of “married” in Internal Revenue Code 7703) she is of course required to absorb all the punitive consequences of the “married filing separately” filing category. The “married filing separately category” is a punitive filing category which is a “hidden tax on Americans abroad“.
In the 2017 tax (and previous) year she had NOT met the filing threshold required to file a U.S. tax return. Using the IRS Interactive “Do I Have To File A Tax Return” tool, we find that:
(Note that this refers to a threshold of $4050 which is the amount of the personal exemption for 2017. The significance of this will be further explained below.)
She did however have financial assets which exceeded the $200,000 threshold required to file Form 8938. Most of these assets were owned jointly with her nonresident alien husband. Because she had not met the filing threshold for “married filing separately” in 2017 and previous years she had not been required to file Form 8938. Notice that Form 8938 does require her to report to the IRS assets that are jointly owned with her “nonresident alien” husband. (By the way he would not be happy about this. I some cases this forces Americans abroad to choose between their U.S. citizenship and their marriage.)
April 2019 – An SOS …
I received a frantic message. She was/is trying to to determine whether she is required to file a U.S. tax return for the 2018 year (based on her $500 of income and her status as “married filing separately”).
On the one hand she is directed by IRS publication 54 (the Bible For Americans Abroad) that her filing threshold is $12,000.
On the other hand, she is being told on the IRS page describing filing thresholds that she is required to file a U.S. tax return.