Changes to the filing threshold for "Married Filing Separately" filing category likely to pressure more Americans abroad to renounce US citizenship

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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:

Married Filing Separate
US taxpayers who are married to nonresident aliens (NRAs – that’s anyone living outside the US who is NOT a US taxpayer) often end up filing using the Married Filing Separate (MFS) filing status unless they have US citizen children who qualify them for head of household status. While it is possible for your NRA spouse to elect to be taxed as a US resident, this is only beneficial if the NRA spouse has very little income or assets. In 2016, 2.09% of all US individual tax returns were filed with MFS filing status – but 17.64% of returns filed from outside the US were MFS returns.[1] Clearly, nonresident taxpayers are much more likely to use MFS.
While TCJA didn’t make any specific changes to the MFS status, there was also some collateral damage in this area. In many ways, the thresholds and limits applied to MFS status are meant to discourage the filing of separate returns. The US tax system has a “marriage penalty” such that a married couple where the two spouses have similar income ends up paying more in US tax than they would have paid as single individuals. The thresholds for MFS are meant to help ensure that couples cannot undo this marriage penalty by filing separate returns. Additionally, if a couple files separately, they must both make the same decision on itemizing deductions or using the standard deduction. For this reason, the income threshold for filing is equal to just the personal exemption for MFS returns, while for all other filing statuses the income threshold for filing is equal to the personal exemption PLUS the standard deduction. TCJA eliminated the personal exemption while increasing the standard deduction.
Since there is no longer a personal exemption, those who use the MFS filing status are required to file a return if they have any income at all in 2018. In 2017 those filing MFS were required to file only if their income exceeded $4050. This change will impact those US citizens, mainly women, who are supported by their NRA spouses while they perform unpaid domestic duties (like raising children). If they are on a joint bank account that earns $5 during the year, they are required to file a US return which will cost them much more than $5 to prepare and will demonstrate that, just like 53.9% of US returns filed from overseas, they owe ZERO US tax. Congress could easily reduce this filing burden by increasing the filing threshold for married individuals with a NRA spouse to include the standard deduction that all such taxpayers are eligible to use.
[1] Data source: https://www.irs.gov/statistics/soi-tax-stats-historic-table-2/

U.S. Tax Filing: What it means for the U.S. spouse who does not earn income but who is married to a nonresident alien who does earn income


In this video you will meet Ruth who was a U.S. citizen married to a nonresident alien – AKA an FBAR Marriage. The interview reveals that her renunciation was largely motivated by the requirement that she disclose to the IRS – accounts that were owned by her husband.
About the same time (2013), the Economist published an article describing the increasing numbers of people renouncing U.S. citizenship.


The comments are interesting (you should read them all) and include:

I relinquished my citizenship this year. I waited to find out if some of the more punitive difficulties for low income expats would be addressed. I waited as Nina Olsen made her report to congress and told them of the horrendous situations they were causing for innocent expat families. Most of those most harmed owed no taxes and were in their late fifties and sixties. I waited as ACA submitted the horror stories of innocent expats to the Ways and Means committee and no response came.
I could wait no more. It is clear to me now that this is a penalty fund raiser on FBARs. FBARS were forms that not even the IRS was telling anyone even existed. They know that.
I make zero income. My Canadian spouse makes all of our income here in Canada. He absolutely was not going to turn over his banking information *or have it turned over for him by our bank* to a foreign country, the U.S. There is no good reason why he should need to do this except we both have our names on our checking account, mortgage and savings. I make zero of the dollars in those accounts but, he had the misfortune to be married to an American. Had he married a citizen of any other modern nation in the world he would have have all of this coming down on him. The cost to comply, the personal violation of even foreign citizen spouses and children is just too much.
The U.S. would have been far better served to go to residency based taxation then concentrate on those living there who are actual “tax cheats” Instead it has treated expats who were formerly supportive of the U.S. as criminals until proven otherwise. This is from the lowest of the low, stay at home mom’s and the elderly to those more well off. It matters not to them that we pay taxes most of us much higher in our home countries. They have threatened us with big stick punishment, they have demeaned us in the press and when harm has come to our families because of their actions we have been called a “myth”
The renouncing figures given by the FBI are 4600 for 2012 not the low numbers that state has. It’s a LOT more than they want you to know because we cannot do anything else. When the cost to your family is so high that the U.S. person in the family becomes a liability then you have to get out whether you want to or not. Who wouldn’t want to after the way this has been handled?
State dept. knows what is driving this and were very,very kind to me when I went in to relinquish. They fully understand that many of us will have no other option. What kind of country does this to innocent expat families all over the world? CBT is wrong and that is why most countries do not do it.
https://www.economist.com/comment/2175770#comment-2175770

Not running away Sandhurst. Forced out. Literally. I would never have relinquished my citizenship if my situation had allowed me to keep it. I could not keep it and have my foreign spouse be able to enjoy all the laws and protections of HIS home country. You have three choices. Divorce your spouse so they are no longer married to an American to protect them. Make sure have no accounts you share with a foreign child too. Do not share any accounts with a foreign spouse at all in some cases making yourself a pauper in the country where you reside or relinquish your U.S. citizenship. None of those choices are fun. Not one is a good solution.
The U.S. needs to go to residency based taxation the way the rest of the modern world taxes. No other country sends their expats away assuming them to be criminals for having moved abroad. Most countries enjoy the fact that their citizens gain experiences and represent them in a positive manner while abroad. They file a final form saying “I have moved” and when or if they return they are welcomed back gladly.
The U.S. doesn’t view it’s expats in a good light and has tax laws that seek to “punish” you for not living there. Upwards of 90 percent of expats would never owe any U.S. taxes but, the other laws are SO onerous one cannot comply with them and continue to live a normal life abroad. Things have to change!
https://www.economist.com/comment/2176771#comment-2176771

Do you share accounts with a foreign spouse who agrees to give all their banking information to the United States even though they are not American and have never lived or worked there? My spouse objects to the thousands per year it costs to show I would never owe any tax but, especially to turning over HIS banking information to a country he has never been a citizen of.
https://www.economist.com/comment/2176774#comment-2176774

Conclusion …
1. As a general principle Americans abroad who file U.S. tax returns are more likely to renounce. As these comments from the article suggest:

Your comment illuminates the stupidity of this whole situation. It is precisely because you are NOT compliant with U.S. laws that you feel that you have the option of not complying. The people who are and have always attempted to be compliant with U.S. tax laws are the real victims here. The irony is:
It’s those who ARE compliant with U.S. tax laws who must renounce to save themselves.
The one’s who have never been compliant – they can assess the risks of non-compliance.
The world of Americans Abroad is “topsy turvy”.
https://www.economist.com/comment/2176966#comment-2176966

2. By requiring more Americans abroad to file U.S. taxes there will be more people who are incentivized to renounce U.S. citizenship
3. The incentives to renounce increase dramatically if the U.S. citizen is required to disclose the financial assets of the nonresident alien spouse.
John Richardson – Follow me on Twitter @ExpatriatonLaw

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