Happily Ever After, Beyond Borders: Tax Planning for International Couples

This line of Lysander from A Midsummer Night’s Dream tells is the timeless truth of love: “The course of true love never did run smooth.”

For every couple getting married, true love will lead to a strong marriage if the couple is prepared for the realities of money matters. For an international couple, the money talk should start with cross-border tax and estate planning because of added complexities.

The U.S. taxation is a far-reaching tax system that is imposed on all “U.S. person” taxpayer. A “U.S. person” is a tax term for an individual who becomes subject to the U.S. tax based by meeting certain tests or elections. Most commonly, someone becomes a U.S. person if she meets the substantial presence test or the greencard test. It’s also possible for someone to be a U.S. person by making an election. There are many income tax implications when a non U.S. citizen becomes a U.S. person, and some basic information on them are discussed in my previous blog Immigration to the U.S. – Tax Planning .

A non-U.S. citizen can become a U.S. person by meeting the Substantial Presence test (essentially, by physically being in the U.S. for so many days). If a non-U.S. citizen is in the U.S. for at least 31 days during the current year and 183 days in the 3-year period including the current year and the 2 preceding years, that person becomes a U.S. person subject to the U.S. tax. The 183 day count is weighted over the 3-year period.

But it isn’t fair for certain cases like international students, professors, diplomats, or professional athletes, because their stay in the U.S. is normally temporary. So the tax law allows such individuals to not count all the days of their temporary presence in the U.S. This is what is called an “Exempt Individual.”  For this day counting, an “Exempt Individual” can exclude her days of presence in the U.S. for the substantial presence test purposes. An “Exempt Individual” is someone in certain immigration or visa categories like “A” or “G” visas (foreign government-related), "J" or "Q" visas (teacher or trainee), "F," "J," "M," or "Q" visas (student), or professional athletes competing in charitable sports events. It is important to note that the “Exempt Individual” must file Form 8843 in order to claim the exempt individual status.

When a U.S. citizen is married to a foreign citizen who is qualified for an exempt individual, the marital status often changes the immigration and visa status, also affecting the filing status. For example, a non-U.S. citizen was on year 2 of his study in the U.S., and was qualified for an “Exempt individual.” But he marries a U.S. citizen and decides to file tax return jointly with his new U.S. citizen wife, he won’t be able to claim the “Exempt Individual” status. If he chooses to file jointly, he would suddenly be subject to the U.S. worldwide taxation, along with the U.S. international reporting scheme. Similarly, If a U.S. citizen living outside the U.S. marries a foreign citizen, joint filing is allowed only in certain circumstances.

This topic of the U.S. tax implications for a non-U.S. citizen whose tax residency is in a transient status (nonresident alien to/from U.S. person) is complex. But one thing is clear: foreign nationals should think carefully about their worldwide tax situation BEFORE becoming a U.S. tax resident. An international couple should review worldwide income, assets and businesses, tax obligations to countries other than the U.S. (“foreign tax”), and any impact of tax treaties. 

A “gift” means a transfer of property to another without compensation. The U.S. tax system views a married couple as one economic unit. Based on this concept, the U.S. gift and estate tax scheme allows an unlimited amount of transfers between spouses, free of tax. This is called the unlimited marital deduction. However, the unlimited marital deduction does not apply to transfers (gifts) to a non-U.S. citizen spouse. The amount of non-taxable gift to a non-U.S. citizen spouse is limited to $100,000, which gets adjusted for inflation annually. The threshold amounts are $175,000 for 2023 and $185,000 for 2024.

In the U.S. gift taxation, a “donor” refers to someone who gives a gift; A “donee” someone who receives a gift. Just like the U.S. income tax, the basic rule in the U.S. gift tax is that all worldwide gifts are subject to tax, if the donor is a U.S. person. However, everyone can gift up to $10,000 per year tax-free. This is what is known as the annual “gift tax exclusion” amount. This gift tax exclusion amount is adjusted to inflation each year – for 2024, it is $18,000; for 2023, $17,000.  If the donor spouse is a nonresident and non-U.S. citizen and the donor spouse is a U.S. citizen, the donor spouse is only subject to gift tax on the gifts of U.S. sited real or tangible personal property. Thus, a donor spouse (nonresident/non-U.S. citizen) can make unlimited gifts of non-U.S. sited property to the U.S. citizen donee spouse.

It's important to note that gifts between spouses can be easily overlooked. Here is an example: a U.S. citizen (a U.S. expat living in Poland) and a Polish citizen are getting married. A generous grandmother of the U.S. citizen gifts $1 million cash to the U.S. citizen spouse for the couple’s first home purchase in Poland. The couple purchases a home with the grandmother’s gift, and titles the home jointly under both spouses’ names. The U.S. citizen spouse just gifted the undivided 50% interest in home to the Polish spouse.

As mentioned above, for “nonresident alien” spouses, the gift tax generally only applies to real property and tangible personal property located in the U. S. Therefore, the nonresident, before becoming a U.S. resident, should complete all nontaxable gift transfers (outright or in trust) and thereby exclude those assets from his or her U.S. taxable gifts.

 Love truly transcends borders. For an international couple with U.S. tax implications, proactive and well thought-out tax planning not only saves money and tax headaches, but also sets a stronger foundation for a secure and prosperous future together. Navigating the intricacies of U.S. tax law as an international couple can feel overwhelming.

Contact us today with any comments or questions about this blog. Feel free to schedule a complimentary initial consultation with me to start navigating through the U.S. tax consequences, implications, and strategies.

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