Living abroad as an American expat with a non-US citizen spouse introduces some interesting financial planning questions relating to asset ownership, estate planning, and tax filing, and the decisions you make can have a significant effect on your finances. In this article, we delve deeper into this scenario and outline the main factors that you should consider.
- Owning assets
- Estate planning
- Filing options when married to a non-resident/non_US-citizen spouse
- Final thoughts
Owning assets with your foreign spouse
As a US citizen with a non-US spouse, how you allocate your assets between you has the potential to increase or decrease your tax liability.
Remember that as a US citizen, you have to file a US tax return even if you live abroad (unless your income is below the minimum tax return filing limits), as well as pay taxes in the country where you live, depending on the tax residency rules there. There are ways to mitigate double taxation, through claiming the Foreign Earned Income Exclusion, or by claiming tax credits in one or other jurisdiction, so always seek advice from tax professionals who have experience working with expats.
There are several ways in which registering assets jointly or solely in your non-US spouse’s name could have tax implications. For example, jointly registering property or other assets with your non-US taxpayer spouse can mitigate US capital gains taxes, as when selling the assets, only half of the gain may be liable to US capital gains tax. This will also depend on your US tax filing status, as described later on in this article.
Furthermore, transferring assets solely into your non-US spouse’s name can reduce both US reporting requirements and potential tax liabilities. Assets owned solely or jointly by a US citizen, especially foreign-registered trusts, companies, and mutual funds, often require complex additional forms during tax filings. However, if these assets were solely in the name of your non-US taxpayer foreign spouse, it may simplify the tax reporting process and reduce potential tax obligations in the US. It can also remove any income derived from assets from being liable to US income tax.
As a US expat with a foreign spouse, you should work with your expat financial advisor to ensure that you structure your assets between you and your non-US spouse advantageously to reduce capital gains and income tax liability and potentially reduce your US reporting obligations. Note that these strategies should always be approached based on your individual circumstances, as well as taking into account both US and foreign tax laws.
Estate planning
As an American living abroad with assets in both the US and in your country of residence, it may be necessary to establish wills in both jurisdictions in consultation with attorneys who are experienced working with expats.
When a US citizen spouse passes away and leaves assets to a non-US citizen spouse, the unlimited spousal exemption isn’t applicable, so, unlike for a US citizen spouse, transfers to a non-citizen spouse may be subject to federal estate taxes. The US citizen spouse still benefits from the estate tax exemption, which at present is approximately $13 million, so this would only be an issue for rather large estates. However, this estate tax exemption is due to sunset at the end of 2025 and therefore it is not clear what the exemption may be in 2026 and going forward. A non-US citizen who is not a resident of the USA only gets a $60,000 estate tax exemption, and so for many such couples this may be the larger estate planning consideration at present.
Couples in this situations might consider, three strategies:
- Seek citizenship: If the non-US citizen spouse becomes a US citizen before the due date of the federal estate tax return, they can qualify for the unlimited marital deduction and also get the full estate tax exemption upon their death.
- Gifting assets in advance: The US citizen can gift up to $164,000 (2022 figure, $175,000 in 2023) annually to the non-resident foreign spouse. Over time, these gifts can accumulate and reduce the estate subject to taxation.
- Establish a Qualified Domestic Trust (QDOT): This type of trust allows a non-citizen spouse to inherit assets without immediate tax implications. The trust ensures the non-citizen spouse receives income during their lifetime while protecting against estate tax. However, when the non-citizen spouse dies, the estate tax applies.
The benefits of a QDOT include allowing the US citizen to leave property in a trust for the non-citizen spouse, providing income without immediate estate tax, and allowing potential tax-free distribution if the non-citizen spouse later becomes a US citizen.
The QDOT must be created within a specific time frame after the first spouse’s death and requires a US citizen trustee or a US corporate trustee if it has assets over $2 million.
Filing options married to a non-resident/non-us citizen spouse
If your foreign spouse lives abroad, their requirement to file US taxes depends on whether they possess a Green Card. Holding a Green Card mandates filing US taxes annually. If your foreign spouse doesn’t have a Green Card, they’re considered a non-resident alien and generally won’t need to file US taxes in their name (referred to as a non-resident spouse). However, If you opt to file jointly rather than separately on your US tax return, even if your spouse doesn’t need to file their own return, they will still become liable for US taxes on their global income.
Generally, filing as ‘single’ is not possible when married to a non-resident alien however, so here are the available options to consider:
- Married Filing Separately (MFS): This default filing status for a US citizen with a non-resident alien spouse avoids additional complexities in filing but may result in the loss of potential tax credits and deductions, potentially leading to higher tax rates.
- Head of Household (HOH): If having a qualifying dependent, filing as Head of Household might be more beneficial. This filing status comes with lower tax rates and additional deductions, provided specific criteria are met, such as maintaining a household for the qualifying person for over half the year.
- Married Filing Jointly (MFJ): Opting to treat the non-resident spouse as a US resident allows filing a joint tax return. While this option offers lower tax rates and deductions, it subjects the non-resident spouse’s income to US taxation, possibly requiring additional informational reporting such as FBAR and Form 8938 filing. Obtaining an ITIN for the non-resident spouse might also be necessary. This option can be advantageous however if the non-resident spouse has minimal income or investments of their own (and isn’t likely to inherit assets in the future).
Final thoughts
For the millions of Americans living abroad who are married to a non-US taxpayer spouse, seeking guidance from an international financial planning professional with legal, tax, and financial planning experience for expats is imperative to help you navigate the cross-border legal, tax and investing landscape in the most advantageous way for your circumstances and as part of balanced long-term financial planning.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
