“You call it madness, but I call it love.” – Don Byas, Jazz Saxophonist
Love is among the top reasons that Americans move abroad, so it’s no surprise that millions of Americans living abroad are married to a foreign spouse.
Living abroad while married to a foreigner throws up some interesting tax and financial planning questions. Does your foreign spouse have to file US taxes? Is it more advantageous to hold assets in your name, their name, or jointly? And, what about estate planning?
In this article, we’ll try to answer some of these questions.
Specifically, in this article, you’ll learn about:
• Does your foreign spouse have to file US taxes?
• Should you file jointly or separately?
• Whose name should your assets be registered in?
• Estate planning considerations
Does your foreign spouse have to file US taxes?
Whether or not your foreign spouse who lives abroad has to file US taxes will depend on whether they have a Green Card. If they do, then they will have to file a US tax return every year as long as they retain their Green Card.
If they have a Green Card because they used to live and work in the US, but they don’t plan to live and work in the US in the future, they might consider renouncing their Green Card to avoid having to file US taxes on their worldwide income.
If your foreign spouse doesn’t have a Green Card, then the IRS considers them a non-resident alien, and they normally won’t have to file US taxes in their own name.
However, if you choose to file jointly rather than separately on your US tax return (and there are certainly situations where this can be beneficial), then despite not filing their own return they will be liable to US taxes on their worldwide income.
Should you file jointly or separately?
If your foreign spouse doesn’t have a Green Card, it’s normally preferable for you to check ‘married filing separately’ in the filing status field on Form 1040. However, there are some situations where ‘married filing jointly’ can be the better option.
If you choose married filing jointly, your spouse will need to obtain a US Individual Tax Identification Number (ITIN), and they’ll be liable to US income tax on their worldwide income. It also means that they’ll be liable for US capital gains tax, reporting their non-US assets and bank and other financial accounts, and all the other reporting requirements that come with being a US taxpayer.
If they have their own income and assets, then it’s normally preferable to keep them outside the US system to reduce hassle, reporting costs, and sometimes having to pay US taxes, too.
If on the other hand they don’t have their own income or assets, then it may make sense to file jointly, as this will increase your allowances.
Bear in mind also your foreign spouses future finances. Perhaps they don’t have income now, but will they in the future? Or, will they inherit assets from their parents perhaps at some point? If so, and if they’re a US taxpayer, then they will become liable for US tax and reporting on their future income and capital gains etc.
Whose name should your assets be registered in?
If your foreign spouse is outside the US tax system, it might make sense to register some of your assets either jointly or solely in their name.
For example, if you register your home jointly and your spouse isn’t a US taxpayer, when you come to sell it, only half of the gain will be liable to US capital gains tax. The same applies to investment assets. It may be that capital gains taxes are higher in the country where you live, and if so you can claim US tax credits that will reduce the US tax to zero anyway, so it depends on your individual circumstances.
Transferring assets to just your spouse’s name also reduces US reporting, as well as potential US tax liability. For example, owning foreign registered trusts, companies and mutual funds either in just your name or jointly all mean filing complex additional forms when you file your taxes. If the same assets were in your non-US taxpayer foreign spouse’s name, you wouldn’t.
Estate planning considerations
If your foreign spouse isn’t a US taxpayer, you lose the unlimited spousal exemption on bequests, meaning that US estate taxes could be payable.
There is still a lifetime exemption of currently $13.61 million however (in 2024), although the figure is due to revert to $6 million in 2025.
There are two ways around this. The first is to gift assets to your non-resident foreign spouse in the meantime. You can gift up to $185,000 a year (in 2024) to your foreign spouse, which over a number of years can add up to significant sums.
The other way is to establish a Qualified Domestic Trust (QDOT). Establishing a QDOT lets your assets be transferred to a trust for the support of your spouse. The income from the trust can be used to pay for their living expenses, including healthcare and maintenance. A QDOT only defers your estate tax liability until the demise of your spouse though, so it’s not always an ideal solution.
Estate planning for mixed US / non-US families living abroad is complex, as normally you’ll need both a US will and another will in the country where you live. Both should be created after seeking advice from a cross border estate planning specialist who has experience of the two countries involved.
Winding up
If you’re one of the millions of Americans living abroad and married to a foreign spouse, it’s important to seek advice and make good decisions in partnership with your financial advisor and accountant to ensure you minimize your tax bill and US reporting requirements.
There will also be tax and financial planning considerations in the country where you live, so it’s important to balance these with your US planning.
Your expat financial advisor should have the experience to answer these questions and guide you.
If you have any questions, don't hesitate to contact us.
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