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Tax Planning for Non-U.S. Citizen Spouses

Posted on: July 22nd, 2015
foreign spouseFor many married couples filing taxes jointly in the United States, tax rules are fairly straightforward. An individual with U.S. citizenship married to a foreign spouse, however, must interpret complex regulations:
  • Residency status and domicile. Not all marriages involving a non-U.S. spouse are taxed the same. How the foreign spouse maintains their residency will determine which tax rules apply. For example, nonresident aliens must pay U.S. income tax only on income earned in the U.S., and estate tax is imposed only on tangible property or assets domiciled domestically. (This is not true for resident aliens, who must pay income and estate tax on worldwide income and assets.) There are caveats that make application of tax rules increasingly complicated. Not only is it important to document how the foreign spouse maintains their residency, but it is also critical to provide valid records of their declared domicile. Depending on how domicile is declared, a non-resident foreign spouse might be able to avoid or minimize their tax liability.
  • U.S. income and estate tax. When determining if a foreign spouse is required to pay income tax, the government will review how long the individual maintains a presence in the U.S. as well as Green card details. Calculating the estate tax due for a deceased foreign spouse involves review of their domicile at the time of their death. If not planned for properly, a surviving spouse might lose a significant portion of their deceased spouse’s assets to estate tax. 
  • Foreign treaties. In addition to understanding how the U.S. federal government recognizes and treats non-citizen spouses for tax purposes, couples should review foreign treaty terms that might apply. Depending on the terms of a treaty, or lack thereof, a couple might face double taxation or be required to manage restrictions regarding domicile. However, treaty terms might not apply depending on how a couple chooses to file. For couples electing to file jointly, according to the IRS, “generally, neither [spouse] can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice [of filing jointly] is in effect and [both spouses are] taxed on worldwide income.” Some income might be exempt from this provision and a treaty’s terms would apply. Check with a tax attorney knowledgeable on foreign law and handling assets in multiple jurisdictions. 
  • Choosing how to file. When a couple with a non-citizen spouse chooses to file jointly, both partners are treated as residents for tax purposes. This choice remains in effect for all future tax years unless the couple suspends their choice and files an amended return, or if either spouse dies, either spouse revokes the choice, a legal separation occurs, or poor records fail to substantiate the status.

Great care should be given when structuring a tax plan involving a foreign spouse. Not only are the U.S. federal government regulations and foreign treaty terms important to review, couples should also learn if their state laws that protect spouses. Our tax attorneys serve North Carolina, Florida, Tennessee, and New York—states with different laws addressing marriages with foreign spouses. Planning without a tax professional could result in an avoidable error, one that might cost a surviving spouse life insurance benefits, or waste assets to estate tax when they could have been preserved for the benefit of the surviving partner. Learn more about estate planning for foreign spouses and ask your attorney how your state’s laws address your assets in the event of death or divorce.

By Attorney Samantha Reichle
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