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Nonresident alien spouse filing as resident on federal return but taxpayer wants to file MFS on two state returns. Is this allowed?

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Level 1

I have a client who has a nonresident, alien spouse and they elected to file with him as a resident alien and applied for an ITIN in conjunction with their filing.  All good so far. Now we have the ITIN and it´s time to file the state returns.

The taxpayer is filing in two ¨states,¨ Arizona and the District of Columbia.  The couple was not married during the period that corresponds with the Arizona residency.  The taxpayer is a foreign service officer who was assigned to Canada during that time but Arizona taxes all domiciliaries on worldwide income regardless of location as residents.  Arizona allows married filing separately even for taxpayers who file jointly on their federal returns. DC allows the same.

The taxpayer´s spouse earned income in Canada, paid taxes in Canada, filed his Canadian tax return.  He also has a first year, loss generating Schedule C business in Canada, and has a Schedule E rental property which had positive net income.  The couple was better off with the election and MFJ status than the other options (MFS, etc). The couple got a ¨court house¨ wedding mid year which corresponded with the taxpayer´s reassignment from Canada to DC.

The question is this:  Can the taxpayer file both state-level returns as married filing separately given this set of facts?  As a follow-on question, if she does, and the spouse never files a DC state-level tax return, will there be a problem?  The spouse has no nexus with Arizona -- they were not married during that time frame.

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Level 15

Assuming the NRA spouse never had a nexus in AZ, the spouse would have no AZ taxable income and taxpayer may file MFS for AZ.

Where did you see that DC does not require the use of the same filing status?  My understanding from the filing instructions and DoC Code is that couples who file MFJ on federal are generally required to use either file MFJ or MFS on a combined return.

Since you have determined that it would be beneficial for your client to file jointly (probably due to the level of income the spouse had), have you verified that they would really be better off filing separate for states, given both AZ and DC allow §911?

As you may be aware, §6013 elections could trigger other reporting requirements, include FATCA and foreign trust, where applicable, and that joint accounts with non-citizen spouses could have unintended gift tax consequences.

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Still an AllStar

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Highlighted
Level 15

Assuming the NRA spouse never had a nexus in AZ, the spouse would have no AZ taxable income and taxpayer may file MFS for AZ.

Where did you see that DC does not require the use of the same filing status?  My understanding from the filing instructions and DoC Code is that couples who file MFJ on federal are generally required to use either file MFJ or MFS on a combined return.

Since you have determined that it would be beneficial for your client to file jointly (probably due to the level of income the spouse had), have you verified that they would really be better off filing separate for states, given both AZ and DC allow §911?

As you may be aware, §6013 elections could trigger other reporting requirements, include FATCA and foreign trust, where applicable, and that joint accounts with non-citizen spouses could have unintended gift tax consequences.

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Still an AllStar

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Highlighted
Level 15

For the NRA spouse's Sch C income, have you checked what type of entity it is, the default classification, and applicability of CTB election as the rules for foreign businesses are different from those that apply to domestic entities?  This could then also trigger a whole new set of filing requirements and tax liability, such as 5471 and GILTI.

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Still an AllStar
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