By Tom Andrews, CPA
When preparing tax returns for clients of the yachting industry I often run into situations when there is an American married to a Non-Resident alien. This may create a series of challenges and potential pitfalls if the non-resident spouse is not fully aware of their income tax responsibilities. This problem is further compounded since the Internal Revenue Service is starting to pay close attention to international tax related issues.
Americans and residents are required to file a tax return and report their worldwide income every year. Non-resident spouse sometimes choose not to file in the United States because they are under the impression that working and living on a foreign flagged vessel while it is in the United States excludes them from having to file a tax return or remit tax. Even if the vessel is foreign flagged, if you are living on the vessel, you may be responsible for United States income tax if you are physically present in the United States.
Non-resident income from labor or services performed in the United States may be exempt from federal taxation if several conditions apply. First, you were not present in the United States for more than 90 days during the tax year. Second, you earned, in total, less than $3,000 while present in the United States. Third, you are an employee of, or under contract with, a foreign person not engaged in a business in the USA; a US person, if the services are performed for the US person’s office overseas; or a foreign office of an agency of the US government. If these three conditions are satisfied, your income is not US-source income and it is not subject to federal income tax.
The United States has negotiated tax treaties with many countries. Some of these treaties allow for an income ceiling above $3,000 or a length of stay limitation beyond 90 days. Most non-resident yachting professionals are citizens of countries with treaties that allow them to be in the United States for up to 183 days, the problem is that many yachting professionals un-knowingly are disqualified from their own tax treaty because they are classified as “non-residents” and do not pay tax in their home country.
If a nonresident does decide to file jointly on their American spouse’s income tax return it is important to remember that making this election will require the nonresident to report their worldwide income on the jointly filed US income tax return, this would include income earned outside the US. For example, if the nonresident owns a rental property outside the United States, the income and expenses from this property would be included on their United States income tax return.
To make matters more complicated sometimes the American spouse becomes a signor or beneficiary of their nonresident spouses foreign bank account. Once an American is a signor or beneficiary of a foreign bank account they might have additional reporting responsibilities that were not previously considered.
It is very important that if you are a non-resident with an American spouse that you communicate this fact with your accountant or Attorney, this is even more important if you have purchased a home and/or are raising a family in the United States.