By Bethany Bouw
Many young, American women perhaps used to imagine what it might be like to marry a prince and live in a faraway kingdom. As the news has been widely covering, one American is about to have that dream come true. While Meghan Markle prepares for her new fairytale life, she will also be facing the many tax pitfalls of an international marriage. Even those who marry their foreign “prince” and move abroad will have to consider some of the same situations Ms. Markle must now deal with. Here are ten tips for those who, like Ms. Markle, will marry a non-resident and non-citizen, and move abroad.
- Taxable Income- For US persons, worldwide income is taxable. Ms. Markle will have to report her worldwide income to the US even though she will be residing in the UK.
- If you live abroad with your nonresident, noncitizen spouse – you will also have to report your worldwide income on your annual income filing with the US.
- Foreign Bank Account Reporting (FBAR)- US persons with foreign bank accounts may run afoul of Foreign Bank Account Reporting (FBAR). If Ms. Markle either has a personal account, joint account, and/or signature authority over foreign bank accounts in excess of $10,000 USD in aggregate, she will need to file an FBAR.
- Similarly, should you as a US person have foreign bank accounts and/or signature authority over foreign bank accounts and exceed the reporting threshold, you will need to file FBARs.
- It is important to keep aware of currency conversion rates with respect to foreign currency accounts as it might seem less than $10,000 USD but exceed upon conversion.
- Earned Income Exclusion- If as a US citizen, she has earned income while abroad (i.e. wage income, self-employment income, etc.), she may qualify for the earned income exclusion. She would then need to keep track of her days outside the US for the determination of qualifying and how much of the exclusion is applicable.
- If you move to the country of your foreign spouse, you may need to keep track as well of the days you spend in the US, days working inside and outside the US, etc. for the foreign earned income exclusion.
- Foreign Investments- Special attention needs to be paid to any investments US citizens may have abroad. In the case that they are determined to be passive foreign investment companies, they will be subject to the dreaded PFIC rules.
- If you are abroad, this means you will also want to pay attention to your foreign mutual funds, foreign pension funds, foreign retirement accounts, foreign investments, etc. as they may be treated as PFICs by the US.
- Foreign Tax Credits- While the taxes on Ms. Markle’s income may not be something she has to directly deal with (Kensington Palace or the Royal Family most likely has their own tax professionals) if you are in a similar situation you will want to keep track of your foreign income taxes for foreign tax credit purposes.
- Depending on the tax rates in the country you reside in, you may be better served by avoiding the exclusion of earned income and instead utilizing the foreign tax credit.
- Abandonment of US Residency- If Ms. Markle was a resident of a particularly “sticky” state, it may be difficult to make a case for abandonment of residence (though in her case, presumably, most people don’t seek to return from royalty). You will need to pay close attention to the rules regarding domicile and residence in the state that you leave to move abroad, if you, like Ms. Markle, move abroad to be with your spouse.
- Receiving Foreign Gifts- It is likely that Ms. Markle will receive large gifts or bequests from the royally wealthy family she is marrying into. The IRS will require that she discloses the amounts and dates of any large gifts she receives.
- Similarly, if you receive gifts or bequests from your foreign family above specific amounts, you will need to file Form 3520 to disclose the amounts received.
- Relinquishing US Citizenship– Ms. Markle may consider relinquishing her citizenship, but should be aware that may contain unforeseen complications for her. Significant taxes may be assessed upon those who wish to give up their US citizenship. Additionally, should Ms. Markle & Prince Harry have children with US citizenship, they may also face a lifetime of international tax headaches. It is best for any parent to be fully aware of tax consequences placed on children, before putting any funds in their name, before they begin employment, or reach an age of majority.
- Similarly, taxpayers who move abroad should make sure to not make rash decisions about their citizenship without the assistance of both a tax attorney and qualified tax professional. They should make sure to also think about the ramifications for their current/future offspring.
- Foreign Spouses Becoming US Residents– It is probable that Ms. Markle & Prince Harry will not make the election to treat Harry as a US resident for tax purposes as that would open a Pandora’s box of tax issues for him. However, once married, she will still need to examine her filing status as a married individual.
- If you do not want to treat your foreign spouse as a US resident for purposes of filing jointly, you will likely be filing as “married filing separately” or as “head of household”. If you are married, in almost all circumstances, you will not be filing as “single”.
- Staying Informed- Most importantly, any US citizen living abroad for marriage will need to keep their qualified tax professional both closely involved and well-informed while embarking on their new union. Their tax expert should advise in making the most appropriate choices for filing status, residence, income, and assets.
- If you are also married to a non-US person, this is not something to ignore and hope it works itself out. It is vital to have qualified tax professional help to smooth out the tax filing process in your first few years of marriage.
Ryan & Wetmore has assisted many clients with their filing status, domicile/residence questions, and foreign income/asset reporting over the years. We would be happy to assist you if you have concerns about your upcoming and/or current tax situation and are happy to work with you on your tax planning.
The International Tax Team at Ryan & Wetmore is well-versed in foreign informational filings. For questions or concerns regarding your international accounts and assets, click here to email our foreign tax team. Please be aware that tax issues are complicated and may vary based on the details of your situation. For this reason, an initial phone call is generally required to obtain the facts and address the questions.
Bethany Bouw CPA, is a manager at Ryan & Wetmore and has been with the firm for over eight years. She has experience with offshore voluntary compliance and assisting taxpayers with foreign asset and entity reporting requirements.
Traci Getz CPA, is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.