Selecting the best tax filing status is an important factor in tax planning. Making the decision how to treat your foreign spouse for US income tax filing purposes can mean either the loss or savings of significant tax dollars. While we all love to save tax dollars, saving them should not be the only factor considered in making the tax filing status decision. For example, if your nonresident alien (NRA) spouse plans to apply for a green card, and eventually to apply for US citizenship, it may be best to make a special tax election to treat the spouse as a US person for tax filing purposes and to file joint tax returns. The special election (under Section 6013(g) of the US Internal Revenue Code) will be discussed in a later blog posting.

Tax Benefits of Filing Head Of Household

If you do not elect to file a joint income tax return with your NRA spouse, you might qualify to file as head of household (HoH). The qualification requirements are set out later. Filing HoH generally means the income of the NRA spouse is not included on the tax return (a big benefit) and also results in a lower tax rate than if you file as married filing separately (MFS). In addition to lower effective tax rates, you can claim a higher standard deduction when filing HoH. For 2013, the standard deduction for MFS is $6,100 whereas for HoH, it is $8,950.

If you do not elect to treat your spouse as a US person, and you do not qualify to file HoH, you would have to file using MFS status. Many clients come to me having made the mistake and filed using “Single” status when they have a NRA spouse. You may NOT file as “Single” if you are married, regardless if your spouse is a NRA.

Reproduced below are the US 2013 tax tables demonstrating the different tax rates for MFS versus HoH. The top rate of tax (39.6%), for example, kicks in for MFS filers once taxable income exceeds US$ 225,000; on the other hand, for HoH filers, the top rate is not triggered until taxable income exceeds US$ 425,000.

Tax Rate			Married Filing Separate	Head of Household
10%			Up to $8,925	Up to $12,750
15%			$8,926 – $36,250	$12,751 – $48,600
25%			$36,251 – $73,200	$48,601 – $125,450
28%			$73,201 – $111,525	$125,451 – $203,150
33%			$111,526 – $199,175	$203,151 – $398,350
35%			$199,176 – $225,000	$398,351 – $425,000
39.6%			Over $225,000	Over $425,000

Requirements for Filing HoH

•  Unmarried – To file using HoH status, various requirements must be met. One such requirement is that you must be considered “unmarried”. For US tax purposes in claiming HoH status, you are considered unmarried if your spouse was a nonresident alien at any time during the year and you do not make the Section 6103(g) election to treat your spouse as a resident for US income tax purposes.
•  Keeping Up a Home – To qualify to file as head of household, you must also have paid more than one-half the cost of “keeping up a home” for the year. In making this determination, include in the cost of “keeping up a home” expenses such as rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home.
•  Qualifying Person – You must also have a “qualifying person” living with you for more than half the year (except for temporary absences, such as school). Your spouse cannot be a qualifying person for HoH purposes. You must have another qualifying person, who could be a child, grandchild or certain other relatives, such as your parents. If the “qualifying person” is your father or mother, that person does not have to live with you but you must be able to claim the parent as a dependent.

Exactly who meets the requirements for being a “qualifying person” depends on precise rules. The IRS has set these out in a convenient chart found in Table 4 of Publication 501.