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By Bethany Bouw, CPA

Around this time of year it is common to find ads for flowers, chocolate, and jewelry which can mean only one thing: Valentine’s Day. While foreign tax considerations are not nearly as romantic and sentimental a gift for your foreign spouse, you can be assured that you will not regret taking the time to consider what their status means for gifts and estates. Presents are still advisable.

Many taxpayers think that once they get through the hurdles of marrying their foreign spouse and the paperwork entailed in marriage, residency, and work permits that it will be just like being married to a US citizen. Unfortunately, that is not the case for US taxation. It is vital to make sure you inform yourself as to what the differences are.

Gifting to non-US spouses

For married couples that are both US citizens, the gifts between the spouses would qualify for the marital deduction and therefore would not be subject to gift tax or eat up one’s unified credit. A couple with one spouse who is not a US citizen have limits on non-taxable gifts and also additional reporting considerations. A non-US citizen spouse who is not a US resident that gifts the US person more than $100,000 in a year creates a reporting requirement. Conversely, a US citizen who gifts their non-US citizen spouse may not be able to do so without creating gift taxation. The annual exclusion for gifts to a non-US citizen spouse is $155,000 for 2019. The annual exclusion for gifts to non-US citizen spouses, like the typical annual gift tax exclusion, is adjusted for inflation. Jointly purchased assets with a non-US citizen could create gifts that the US citizen needs to consider against the annual exclusion. Depending on where you live, buying a house could incur a gift tax or force the taxpayer to use a portion of their unified credit.

Example A:

Megan, a US citizen, is married to Harrison, a UK citizen. Megan gifts Harrison $150,000 in 2019. Megan may use her annual gift tax exclusion for gifts to a non-US spouse and is not subject to gift tax on the gift to her non-US spouse.

Example B:

Assume all the same as Example A, except the gift in 2019 from Megan to Harrison is $170,000. This amount exceeds the annual gift tax exclusion for gifts to a non-US spouse by $15,000. Megan would not be subject to gift tax on the $155,000 and would be subject to gift tax on the remaining $15,000.

Example C:

Harrison, as above, lives in the UK with Megan and Harrison is not a US resident alien. Harrison gives Megan $200,000 in 2019 to invest. Megan needs to report the gift on Form 3520 Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts due to Harrison’s status and because the gifted amount exceeds the $100,000 reporting threshold.

Estate Considerations

Estate concerns should be a huge consideration for couples that have split citizenship. When a married couple is both US citizens, if one predeceases the other there can be a passing of assets to the spouse with no limitation, no taxation, and no eating up of the unified credit. However, when the surviving spouse is not a US citizen, there is no unlimited marital deduction and the passing of assets would be taken against the unified credit of the decedent. This may not be a huge factor for most taxpayers as the current unified credit is over $11 million.

For couples that have a non-US citizen spouse as one of the pair, they should consider the potential of a Qualified Domestic Trust to ensure a beneficial passing of assets to a non-US citizen surviving spouse.

If you are a couple with a non-US citizen spouse, you should make sure to do the following:

  • Have a conversation with your qualified tax preparer, so they are aware of the potential pitfall areas
  • Consider meeting with an attorney to address the legal issues related to estate considerations
  • Be mindful of gifts, including jointly purchased assets.

The International Tax Team at Ryan & Wetmore is well-versed in foreign informational filings and complicated tax matters related to foreign gifts. For questions or concerns regarding your international accounts, entities, 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.

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