Tax options for Irish-American couple

I’m looking for advice on what method of taxation would be better for us. My wife and I were married last year. She is American and I am Irish. We are not sure whether we should opt for single person, separate or joint assessment for tax purposes. Can you advise?

Mr J. K., email

I'm assuming the complicating factor here, in your minds, is your wife's status as an American citizen and her consequent obligation to file an annual return on her income and assets to the US Inland Revenue Service (IRS).

The US authorities expect her to file a return with details of her worldwide income, capital gains and any inheritances. The return will have to be denominated in dollars and any taxes due must be paid by a set deadline, also in dollars.

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I’m sure your wife is familiar with this from filings she would have made prior to your marriage while she was living here.

So how does that affect your position with the Irish tax authorities? Not at all. And as Ken O'Brien, a tax director at PwC specialising in employment affairs, says, there is no reason why you should not arrange your tax status in Ireland in such a way to deliver the best "tax answer" for you as a couple.

Let's take a look at the options. These are joint assessment, separate assessment or separate treatment/single assessment.

As Revenue notes, joint assessment is the option that is automatically applied on marriage. You can choose the alternative options of separate assessment or separate treatment but you will need to let Revenue know before March 31st in the year of assessment.

Under joint assessment, you are liable to tax on your combined incomes . One party is held liable for the assessment and you can choose whether that should be you or your wife. This is just an administrative thing to ensure the Revenue has one channel of communication for the tax liability.

If you don’t actively make a choice, Revenue will assume the higher earner is the assessable person.

The second option is separate assessment. In this case, you and your wife will be taxed as single people during the year but you will be able to transfer any unused tax credits, reliefs and or rate band space available between you so that you will benefit to the same effect as under joint assessment in minimising tax liability.

The third system is separate treatment, which is more generally known as single treatment or single assessment. Under this regime, you and your wife are taxed as if you are not married at all. The drawback is that if either of you does not earn enough to use up all your personal tax credits, reliefs or full tax band space, it cannot be transferred, potentially leaving you with a larger bill.

So, the choice is yours and it seems sensible to choose either joint assessment or, if you are more comfortable with ring-fencing your wife’s income while still maximising any credits or reliefs between you, separate assessment.

It’s worth noting that, as Revenue reminds me, making a choice on how you are assessed assumes that you are both tax resident in Ireland for the tax year in question. If not, then the Irish tax resident will be taxed as a single person.

So what about the US liability?

Revenue is not concerned with how other countries’ tax systems work as that is not a responsibility of theirs. However, Ken O’Brien notes that tax systems are perfectly well able to work out tax liabilities and credits even where you file as an individual in one country (the US) and as part of a couple in another (Ireland).

Now, I am no way an expert in the intricacies of the US tax code but there are two options that may reduce or avoid paying tax in the US altogether. The first is the foreign-earned income exclusion. This allows you to exclude from US tax liability any income earned in another country up to a certain threshold.

In 2018, that limit was $103,900. If your income from Irish employment translates into a sum less than this, you will have no income tax liability in the US; if it is more than this, you pay US tax on the difference.

The exclusion threshold is set annually. It covers only income tax and not income from other sources such as dividends, bank interest, pensions or capital gains.

The second option is what is called the foreign tax credit, which allows a credit against US tax for tax paid in another country. You should take advice as to which of these is the best option for you given the sources of your wife's income.

Getting back to the Irish Revenue, it is worth remembering that for last year, the year you were married, you will automatically be assessed as single people – separate assessment. However, if it transpires that you would have done better under joint assessment, you can make a claim back for a refund of the difference. However, do remember that the refund will be paid pro rata depending on when last year you were married.

So, if you were married in March, you would get three-quarters of any difference between joint assessment and separate assessment whereas, if you were married in September, the refund would be just a quarter of the difference.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice