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As an unmarried couple, you would normally have a Single filing status, however, when you get married this could change to a Married Filing Separately or Married Filing Jointly. If you previously had a Head of Household filing status, this could also change to Married Filing Separately, Married Filing Jointly, or you could even remain as Head of Household in certain circumstances.
Married filing separately is when married taxpayers elect to file their US tax returns separately. For US/non-US spouses, the default rule is for the US spouse to file separately.
Advantages
Filing separately can be beneficial when one spouse is a nonresident alien, which is a person who is not a US citizen and does not pass the green card or substantial presence tests used to determine tax status. Also, where filing separately might be equally beneficial is where both are on high incomes and filing jointly would shift a couple into the 37% tax rate bracket.
Disadvantages
For most taxpayers, filing jointly makes use of the lower tax bands which lowers the US tax liability. You might also forfeit a number of tax credits that are available if you file separately, such as the child tax credit.
Rachel and Frank are two US citizens living in the UK, who each have taxable income of $500,000 in 2018. When filing Single, their US tax liabilities would have been $152,943 each ($305,886 in total). Whereas Married Filing Jointly moves them into the 37% tax bracket creating a joint liability of $340,144. This is an increase in the US income tax liability of $34,258.
Potentially, as they are UK resident some or all of this income could be foreign sourced and foreign tax credits could be used to reduce the US tax liability down to nil. In this example, the main disadvantage would be the reduction in the excess foreign tax credits carried over to the next year. Therefore Married Filing Separately could be a better option for them if they had US sourced income (such as US rental income, US dividends, or effectively connected income to a US trade or business), or they wanted to preserve their excess foreign tax credits.
Married taxpayers can elect to file jointly or separately. For US/Non-US spouses, the default is for the US spouse to file separately unless there is an election made for the non-US spouse to be a resident alien for tax purposes.
Advantages
In most situations, it is more beneficial for married taxpayers to file jointly as the lower tax bands are doubled and there are various tax credits that you are more likely to get if filing jointly.
Disadvantages
If you are a nonresident alien spouse, electing to be a resident alien, and have large income not subject to US tax, you would have to comply with additional informational reporting requirements, which you otherwise would not have had to.
Lucy and Ben are married. Lucy is the US taxpayer and has $200k of taxable income in 2019. Ben is not a US taxpayer but elects to be a US taxpayer to file jointly as his taxable income is $0. Married filing jointly in this example would potentially be worthwhile as the tax savings can be up to nearly $9,000.
The following are the US tax liabilities for the various filing status:
From the above, you can see that being married does not increase the tax liability and if filing jointly you can make an even larger saving.
To claim Head of Household, you must generally be unmarried although if you are married to a nonresident alien this counts as unmarried for these purposes. You must also have paid at least half the costs of keeping up a home for the tax year and had a qualified person, such as a dependent, living at home.
Advantages
This is more advantageous than Married Filing Separately and is useful in an example when the nonresident alien spouse does not want to elect to be a resident alien.
Disadvantages
The main disadvantage is checking each year whether you qualify for this filing status.
If we take the example of Lucy and Ben. If Ben decided not to elect to be a resident alien due to the additional paperwork required for the foreign financial asset reporting, then the next best option for Lucy would be Head of Household, provided that she qualified for this tax status.
Transfer taxes is usually the main tax advantage of being married. The ability to transfer assets to each other and have an unlimited marital gift tax and UK inheritance tax exemption.
However, again there can be complications if there is a US citizen spouse married to a UK citizen and domiciled spouse. The marital exemption is limited in both the US and the UK. This might not matter so much if the US citizen’s estate is below the current $11.4m lifetime exemption amount, and there is always additional relief for married couples compared to unmarried couples.
In the US, the marital exemption is limited to $155,000 per annum for lifetime gifts from a US to a non-US domiciled individual. There is no marital exemption on death for transfers from a US to a non-US spouse, but this might not be an issue if the US spouse estate is below the current $11.4m lifetime exemption amount. If the estate exceeds this then you may want to consult with a lawyer to have your wills updated to potentially include some planning involving a Qualified Domestic Trust (QDOT) to help defer any US estate tax to the second death.
For transfers from UK-domiciled spouses to non-UK domiciled spouses, there are also marital exemption limitations. In the UK, the marital exemption is limited to £325,000 for both lifetime gifts that are not exempt under the potentially exempt transfer rules, as well as transfers on death. There is also a nil rate band that is available in the UK of £325,000, which is in addition to the marital exemption.
Other benefits to marriage include ‘no gain no loss’ on transfers of assets between spouses. This can also avoid double taxation if transferring assets when not married, as the US will generally not tax the gift of an asset for capital gains purposes, but the UK does unless you are married. The point being that an unmarried person who receives an asset that has appreciated in value inherits the original cost basis, meaning they could be subject to US tax on the same gain once the asset is sold. Married couples with low income (with one spouse earning less than the personal allowance) can potentially transfer a portion of their personal allowance.
For professional advice tailored to your unique circumstances, please fill out the form below and one of our experts will be in touch to discuss your requirements and how we can help. Please note that our advisory services are charged at our hourly rates and a formal engagement will need to be in place before any advice is provided.
The full Stepping Stones series can be found here.
7 March 2024
Stepping Stones: What Americans in the UK need to know about divorce
Stepping Stones: What Americans in the UK need to know about taxation for children
US tax
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Stepping Stones - supporting Americans with each step of their unique journey in the UK
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Martin Scullion
