Filing taxes next year as Dual Status Alien could cause problem with Obamacare?
Apr 28th 2018, 3:42 am
#1
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Joined: Apr 2018
Posts: 3
Filing taxes next year as Dual Status Alien could cause problem with Obamacare?
So, I had a tax question earlier today that some members were so kind as to answer.
However, the answer has raised some potential problems. A brief rundown.
I am US Citizen married 4 years ago to UK citizen and have been living in UK for last 4 years. My Wife, a UK citizen just recently retired from her job in the UK with a private company pension and we have just arrived in the US to retire together.
We entered the US on Feb 27th 2018. She has since received both her SS# and Green Card. We are now permanent residents of the USA.
On arriving to the US we applied last month to the Healthcare Marketplace for health insurance. We estimated our annual household income based on her pension which started in April 2018 through December 2018 and my estimated income. We were under the Income limit and have been deemed eligible for the tax credit for insurance. The credit is approximately about $1500 per month. We opted for the Bronze insurance as the credit was exactly the same as the cost of that insurance.
We did not use her UK income from her job prior to retirement for the months of Jan, Feb, prior to her arrival in the US. If we had used those two months our income would have been over the limit and we would have not received the health care tax credit. We planned on her filing as a dual status alien resident and not having to claim the income prior to her arrival in the states.
Here is the problem now. In order to be eligible for tax credits for healthcare a couple must file Jointly.
On looking ahead for the instructions for filing as a Dual Status Alien Resident, the instructions state that in order to file with that status she cannot file a Joint return for the tax year 2018. She must file separate. She can forgo that status by making a declaration along with myself that she would like to be treated as a resident of the US for the whole tax year. If we make this declaration we can then file Jointly.
Here is a copy of those instructions:
Married filing jointly election
If you are a dual-status alien, and are married to a U.S. citizen or resident alien at the end of the year, you may make an election under ยง 6013(h) to file as married filing jointly. This election will treat you as a resident alien the entire year, so you will not be subject to the restrictions on dual-status taxpayers as outlined above. However, this election will also make your worldwide income subject to U.S. reporting for the entire tax year, as well as FBAR and FATCA reporting requirements for the entire year.
You may make this election if all of the following apply:
You are a nonresident alien at the beginning of the year
You are a resident alien or U.S. citizen at the end of the year
You are married to a U.S. citizen or resident alien at the end of the year
Your spouse joins you in making the choice.
When you make this election, the following apply:
You will be treated as a resident alien for the entire tax year and taxed on worldwide income
You must file a joint return for the year you make this choice
Neither you nor your spouse can make this choice for any later tax year, even if you are separated, divorced or remarried.
So hopefully you can see the problem. If we make the declaration and file jointly, her UK income before arriving in the US must be declared, and that would push our income above the qualifying limit for healthcare tax credits.
But we must file jointly or we don't qualify for the tax credits anyway.
Had anyone encountered this dilemma? I am really worried as our health insurance is due to kick in on Tuesday the first of May but if we cant figure this out then I could potentially be asked to repay the tax credits of $1500 per month times 8 months for a total of $12,000. That is crazy money just to purchase health insurance with a $14,000 deduction for the two of us.
Is there a way to file jointly but not have the income from her job in Jan and Feb in the UK not reported? Its already been taxed in the UK at 40% anyway.
Or do I just need to call the Marketplace on Monday and cancel the health insurance for this year and we go without a safety net till next year?
Thanks
Dave and Lynne
However, the answer has raised some potential problems. A brief rundown.
I am US Citizen married 4 years ago to UK citizen and have been living in UK for last 4 years. My Wife, a UK citizen just recently retired from her job in the UK with a private company pension and we have just arrived in the US to retire together.
We entered the US on Feb 27th 2018. She has since received both her SS# and Green Card. We are now permanent residents of the USA.
On arriving to the US we applied last month to the Healthcare Marketplace for health insurance. We estimated our annual household income based on her pension which started in April 2018 through December 2018 and my estimated income. We were under the Income limit and have been deemed eligible for the tax credit for insurance. The credit is approximately about $1500 per month. We opted for the Bronze insurance as the credit was exactly the same as the cost of that insurance.
We did not use her UK income from her job prior to retirement for the months of Jan, Feb, prior to her arrival in the US. If we had used those two months our income would have been over the limit and we would have not received the health care tax credit. We planned on her filing as a dual status alien resident and not having to claim the income prior to her arrival in the states.
Here is the problem now. In order to be eligible for tax credits for healthcare a couple must file Jointly.
On looking ahead for the instructions for filing as a Dual Status Alien Resident, the instructions state that in order to file with that status she cannot file a Joint return for the tax year 2018. She must file separate. She can forgo that status by making a declaration along with myself that she would like to be treated as a resident of the US for the whole tax year. If we make this declaration we can then file Jointly.
Here is a copy of those instructions:
Married filing jointly election
If you are a dual-status alien, and are married to a U.S. citizen or resident alien at the end of the year, you may make an election under ยง 6013(h) to file as married filing jointly. This election will treat you as a resident alien the entire year, so you will not be subject to the restrictions on dual-status taxpayers as outlined above. However, this election will also make your worldwide income subject to U.S. reporting for the entire tax year, as well as FBAR and FATCA reporting requirements for the entire year.
You may make this election if all of the following apply:
You are a nonresident alien at the beginning of the year
You are a resident alien or U.S. citizen at the end of the year
You are married to a U.S. citizen or resident alien at the end of the year
Your spouse joins you in making the choice.
When you make this election, the following apply:
You will be treated as a resident alien for the entire tax year and taxed on worldwide income
You must file a joint return for the year you make this choice
Neither you nor your spouse can make this choice for any later tax year, even if you are separated, divorced or remarried.
So hopefully you can see the problem. If we make the declaration and file jointly, her UK income before arriving in the US must be declared, and that would push our income above the qualifying limit for healthcare tax credits.
But we must file jointly or we don't qualify for the tax credits anyway.
Had anyone encountered this dilemma? I am really worried as our health insurance is due to kick in on Tuesday the first of May but if we cant figure this out then I could potentially be asked to repay the tax credits of $1500 per month times 8 months for a total of $12,000. That is crazy money just to purchase health insurance with a $14,000 deduction for the two of us.
Is there a way to file jointly but not have the income from her job in Jan and Feb in the UK not reported? Its already been taxed in the UK at 40% anyway.
Or do I just need to call the Marketplace on Monday and cancel the health insurance for this year and we go without a safety net till next year?
Thanks
Dave and Lynne
Apr 30th 2018, 12:02 am
#2
Lost in BE Cyberspace
Joined: Jan 2006
Location: San Francisco
Posts: 12,865
Re: Filing taxes next year as Dual Status Alien could cause problem with Obamacare?
I don't know anything about dual status filing, but you are correct that for an ACA credit for a married couple you must file married filing jointly. Additionally, $750 a person is not "crazy money" for health insurance, unfortunately, particularly as I presume you are over 60 (the highest rating category) or close to it.
From the limited amount you've written, it seems that it is the differential between your wife's previous salary and her current pension payments that cause you to go beyond 400% of the federal poverty level ($64k for a couple iirc). Is there any way she can defer pension payments so that you remain below the threshhold? You don't say anything about your income but can you similarly defer anything until the next tax year?
You should also do some calculations for subsequent tax years until you are both eligible for Medicare (another potential minefield) as it sounds like you may run into similar issues if she is in receipt of her pension for a full tax year.
If you have income and assets, you should think very carefully about foregoing insurance. As many threads on this forum attest, US healthcare costs can easily run to insane amounts, especially if a hospitalization is involved. Before the ACA, an inability to pay medical bills was the commonest reason for personal bankruptcy.
From the limited amount you've written, it seems that it is the differential between your wife's previous salary and her current pension payments that cause you to go beyond 400% of the federal poverty level ($64k for a couple iirc). Is there any way she can defer pension payments so that you remain below the threshhold? You don't say anything about your income but can you similarly defer anything until the next tax year?
You should also do some calculations for subsequent tax years until you are both eligible for Medicare (another potential minefield) as it sounds like you may run into similar issues if she is in receipt of her pension for a full tax year.
If you have income and assets, you should think very carefully about foregoing insurance. As many threads on this forum attest, US healthcare costs can easily run to insane amounts, especially if a hospitalization is involved. Before the ACA, an inability to pay medical bills was the commonest reason for personal bankruptcy.
Last edited by Giantaxe; Apr 30th 2018 at 12:04 am.
May 4th 2018, 12:03 am
#3
Grumpy Know-it-all
Joined: Jul 2010
Location: Calgary, Alberta
Posts: 8,928
Re: Filing taxes next year as Dual Status Alien could cause problem with Obamacare?
It's one of these weird situations with the ACA that they didn't quite plan for and one of the reasons why I generally say to move to the US around the start of the year if you can so you can claim to have become resident on January 1st.
Really it boils down to which costs you the most money, paying the US tax on the UK-source income or paying for the insurance. My guess is $1,500 a month is likely a hell of a lot more than the US tax on her UK income for six weeks. Mmmm, she could file for a foreign tax credit on 1116 but I'm not sure that's kosher seeing as she didn't actually live in the US and is only claiming to be resident.
Has she filed a P85 with HMRC? If she hasn't, she could put 31st December 2017 on it and then claim to be non-resident in the UK and then she can legitimately claim the foreign tax credit. Assuming HMRC believe her. But technically speaking that's a lie as well.
So if she wants to be super duper honest paying the US tax on her UK income is probably the way to do it. And make sure you both file P85s with HMRC if you haven't already.
I'd have a chat with the IRS and see if they're okay with her claiming the foreign tax credit, I'm not sure how they deal with it if she was factually a resident of another country and is only claiming to be resident in the US.
Really it boils down to which costs you the most money, paying the US tax on the UK-source income or paying for the insurance. My guess is $1,500 a month is likely a hell of a lot more than the US tax on her UK income for six weeks. Mmmm, she could file for a foreign tax credit on 1116 but I'm not sure that's kosher seeing as she didn't actually live in the US and is only claiming to be resident.
Has she filed a P85 with HMRC? If she hasn't, she could put 31st December 2017 on it and then claim to be non-resident in the UK and then she can legitimately claim the foreign tax credit. Assuming HMRC believe her. But technically speaking that's a lie as well.
So if she wants to be super duper honest paying the US tax on her UK income is probably the way to do it. And make sure you both file P85s with HMRC if you haven't already.
I'd have a chat with the IRS and see if they're okay with her claiming the foreign tax credit, I'm not sure how they deal with it if she was factually a resident of another country and is only claiming to be resident in the US.
