Non-Resident Alien Spouses of American Citizens or Residents

By Tom Andrews, CPA

When preparing tax returns for clients in the yachting industry I often run into situations where 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 issues.

Since Americans are required to file a tax return and report their worldwide income every year the non-resident spouse sometimes chooses not to file 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 and you are living on the vessel, you may be responsible for United States income tax if that vessel is docked in the United States.

Non-resident income from labor or services performed in the United States is free from federal taxation if several conditions apply. First, you were not present in the USA for more than 90 days during the tax year. Second, you earned, in total, less than $3,000 from the US-based work. 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 tax.  Since most nonresident yacht crewmembers earn more than $3,000 while they are in the United States their income will probably not be exempt.

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.  It should also be noted that if the nonresident crewmember fails the “substantial presence test” they might be required to report their worldwide income to the IRS.

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 talk with a CPA or Attorney to review your individual tax situation, this is even more important if you have purchased a home and/or are raising a family in the United States.

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