Taxpayer asks:

I have been married to my second wife for 1 year and I am in the process of finishing up my 2016 tax returns.

I have lived in Guatemala for 8 years and have only been in the USA two weeks the last 8 years. I will never spend more than a couple of weeks a year in the USA in future.

My wife and I were married and live in Guatemala. We were not legally married in the USA only in Guatemala. We spend no time in the USA. My wife is a non resident alien and has no USA income or any business related activity or any involvement in the USA whatsoever other than she married me, a USA citizen.

I have no income or business or work activity in the USA other than I have owned and managed a rental property near Doylestown, Pa since 2009 (that prior to 2009 was my primary residence). Because of the depreciation on the rental property and I have no taxable income. My tax returns show a negative adjusted gross income every year.

The only income I have is given to me by my wife. I do not show it on my tax return because the source is from my wife. I help her run her businesses that she is the 100% owner of. She either gives me cash or makes a deposit into my personal bank account in Guatemala from her personal bank account in Guatemala. I never allow my bank account to have a balance greater than $10K so as not to have to submit a FBAR.

Can I correctly file as single? Or do I need to file as married filing separately?

If I can correctly file as single, is the money I receive from my wife considered taxable income by the IRS?

Even if I showed the money received from my wife as income I would pay no tax because of the Foreign Tax Exclusion if it can considered wages or salary. If it is considered self employment income I would pay only self employment taxes because I have enough losses from the rental property to offset the income.

If I can file correctly as single please send me the link or text from an IRS Publication or IRS documentation that supports that I may file single because I was not married under USA law or any USA State law.

Taxgirl says:

I’m not quite sure why you think you’re not considered married in the United States. Typically, marriages performed overseas are considered valid in the country where they take place if they are entered into in accordance with local law and those marriages are recognized as valid in the United States. Exceptions do exist, but those tend to involve violations of the laws of that state. Violations include those that are against societal norms (polygamy, for example) or those that specifically break existing laws in the state. A good example is that, before the U.S. Supreme Court ruling in United States v. Windsor, same-sex marriages conducted abroad (or in states that recognized same-sex marriages) were not considered legal in some states because of laws prohibiting same-sex marriages.

All of that said, my guess is that you are considered married in the United States. However, if you’re not sure, you can always check with the Attorney General in your state for confirmation.

When it comes to filing taxes, you can choose from one of five filing statuses on a federal tax return:

  • Single;
  • Married Filing Jointly;
  • Married Filing Separately;
  • Head of Household; and
  • Qualifying Widow(er) With Dependent Child.

For federal income tax status, marital status is determined by state law as of the last day of the calendar year. If you are married on December 31, you are considered married for the year.

If you’re not married because you were never legally married or you were legally separated or divorced according to the laws of your state, you can file as single. If you are not single, you would need to file as married (either separately or jointly).

As a U.S. citizen, you are generally taxed on your worldwide income so where you earn your income doesn’t matter for reporting purposes. Some exceptions apply under tax treaties (the U.S. does not have a tax treaty with Guatemala) and income may be exempt or excluded under existing U.S. law, such as the foreign earned income exclusion. And if you pay taxes to a foreign country on income earned in that country, you may be entitled to a foreign tax credit. Keep in mind that income that would be tax-free under U.S. law or income tax treaty may still need to be reported.

Money that you receive as a gift or inheritance is generally not taxable for federal income tax purposes. And, gift recipients don’t pay federal gift tax (any gift tax due is paid by the donor).

The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return” based on provisions in the Tax Code. In the tax world, we like to say that gifts are given merely out of “love, affection, respect or admiration.” Your arrangement doesn’t sound like “detached and disinterested generosity,” the standard quoted in Commissioner v. Duberstein, 363 U.S. 278 (1960), it sounds like compensation.

So I’m not sure that your situation is as simple as you make it out to be. Real estate rental income – especially if you’re not actively managing the real estate – may be considered passive income which carries with it particular tax issues. I do think you have a compensation issue and you’ll want to be sure to get the characterization and reasonableness of that compensation right. There are a lot of issues here that may require a second look. I would highly recommend that you consult with a competent tax professional who is well-versed in international issues before filing your return – especially since the IRS has made it quite clear that they consider international tax issues a top compliance priority.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

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Kelly Erb is a tax attorney, tax writer and podcaster.

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