Married Filing Separately
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.
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.
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.
Who would this option be right for?
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.