Foreign Earned Income Exclusion or Foreign Earned Credit - Nonresident Spouse

Question

I am planning to file married filing jointly. We married last year in Oct 2021, and my wife is a resident of Canada. She does not work in the USA nor has ever been to the USA. It's recommended we file married filing jointly for the USA Tax return, due to immigration reasons. I make about $150,000 a year, she makes about $48,000 USD equivalent. Is her income excludable per the IRS tax treaty? She is a Canadian PR and an Indian Citizen.

She has never been in the USA, her tax home is Canada, so per Form 2555 she should meet the requirement to be able to exclude her income? I am saying it will be added, but will also be excluded, so the net effect on our tax return would be 0. She does of course pay Canadian Income tax. Seems two options, to exclude her income using Form 2555 or to take foreign tax credit using form 1116. Anyone have expertise?

It does state on, https://www.irs.gov/individuals/international-taxpayers/nonresident-spouse

"Generally, neither you nor your spouse can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice is in effect. However, the exception to the saving clause of a tax treaty might allow a tax treaty benefit on certain specified income."

pk12_2 · Answer

@superduper , you present somewhat of a complicated issue here. But to be sure that I understand the situation, below is what I understand from your post:

(a) you , a US person ( citizen / Green Card ) living and working in Canada OR you a US person ( citizen/ Green Card/ Resident for Tax purposes ) living and working in the USA ;

(b) Spouse a NRA ( not residing in the USA, NO SSN / ITIN, citizen of India, PR of Canada .

(c) Wish to file as MFJ ( Married Filing Jointly);

Now the question is how to (1) exclude spouse's income ; OR (2) assert treaty privileges OR (3) take foreign tax credit against US taxes.

Because the spouse is a Non-US person , there is no requirement for her to file a US return-- marriage to a US person does not affect her Non-Resident Alien status and with no US sourced income, this position is even more secure. If on the other hand she wishes to be taxed as a US resident ( for tax purposes or otherwise ), her world income comes under the purview of US taxes.

To be a resident for tax purposes ( and thus be bale to file jointly with a US person spouse), one needs to meet the Green Card test or Substantial Presence Test or be eligible to request to be treated as a resident for Tax purposes if and only if one meets a number of conditions including be present on US soil.--:

Resident alien.

A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year.

Green card test. You are a U.S. resident if you were a lawful permanent resident of the United States at any time during the calendar year. This is known as the green card test because resident aliens hold immigrant visas (also known as green cards).
Substantial presence test. You are considered a U.S. resident if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
1. 31 days during the current calendar year; and
2. A total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only ¹/₃ the number of days of presence in the first preceding year, and only ¹/₆ the number of days in the second preceding year.
If you do not meet either the green card test or the substantial presence test for the current year (for example, 2020) or the prior year (2019), and you did not choose to be treated as a U.S. resident for part of the prior year (2019), but you meet the substantial presence test in the following year (2021), you can choose to be treated as a U.S. resident for part of the current year (2020) and be taxed as a dual-status alien for the current year (2020). To make this first-year choice, you must:
1. Be present in the United States for at least 31 days in a row in the current year (2020), and
2. Be present in the United States for at least 75% of the number of days following the 31-day period, beginning with the first day of the 31-day period and ending with the last day of the current year (2020). (For purposes of this 75% requirement, you can treat up to 5 days of absence from the United States as days of presence in the United States.)
When counting the days of presence in (1) and (2) above, do not include the days you were present in the U.S. as an exempt individual.

If you make the first-year choice, your residency starting date for the current year (2020) is the first day of the earliest 31-day period (described in (1) above) that you use to qualify for the choice. You are then treated as a U.S. resident for the rest of the year.

If you are present for more than one 31-day period and you satisfy condition (2) above for each of those periods, your residency starting date is the first day of the first 31-day period. If you are present for more than one 31-day period but you satisfy condition (2) above only for a later 31-day period, your residency starting date is the first day of that later 31-day period.

As you can see from the above quotes, there is very basic and foremost requirement to be present in the USA before one can take advantage of being a "resident for tax purposes" and the all the other eligibility that follow therefrom.

Bottom line of all this is that you cannot file as Married Filing Jointly, till your spouse has actually lived in the USA for at least 31 continuous days.

Without knowing more about your own status ( citizen / Green Card / Resident for Tax purposes ); tax home, and country of citizenship ( if not US citizen ); it is very difficult to answer these questions with any certainty ( in some cases treaty conditions may affect the path ).

Is there more I can do for you ?

pk