3 Tips to Help Minimize Your Taxes
Congratulations, you’re getting married! As you plan your nuptials, tax planning may be the last thing on your mind. However, if you’re a U.S. expat marrying someone from another country, the decisions you make when setting up your household can have far-reaching consequences down the road. Mixed-nationality families with only one U.S. citizen spouse face special considerations, especially when it comes to their tax obligations. Start your marriage abroad off on a good foot, tax-wise, by implementing the following tax strategies.
#1 – Decide how to title your assets.
One of the biggest financial challenges faced by U.S. expats with non-citizen spouses is properly titling their assets. Many new spouses living in the United States choose to commingle their assets. However, mixed-nationality couples living outside the U.S. may want to consider keeping their assets separate for several reasons:
- Foreign financial assets held in joint accounts are reportable by a U.S. person and tax may be payable on income and gains in such an account. It’s not necessarily optimal for the U.S. citizen spouse to own foreign financial assets, due to the complex and potentially punitive U.S. taxation of certain foreign financial assets.
- The non-U.S. spouse may continue to hold certain non-U.S. financial assets, as these assets are generally not subject to U.S. taxation when held by a non-resident non-citizen.
- A non-resident alien (NRA) spouse can have a U.S. brokerage account in his or her name only. This will allow for management of the couples’ assets in a coordinated manner.
Don’t automatically assume that joint ownership is the correct solution for your circumstances, as this can make your tax situation unnecessarily complex. Instead, be strategic and consider issues such as liquidity and estate planning when titling assets.
#2 – Give wisely.
Cross-border and mixed U.S./non-U.S. families face special considerations when it comes to estate planning. The unlimited spousal exemption normally granted to U.S. citizen couples does not apply to bequests to non-U.S. citizen spouses upon the death of a U.S. citizen spouse. That means assets passed from a U.S. citizen to a non-citizen spouse may be subject to federal estate taxes. A U.S. citizen still enjoys their lifetime exemption of $12.06 million (2022), which is valid for assets left to anyone (including a U.S. citizen spouse). Note, however, that this amount is expected to sunset in 2025, reverting back to around $6 million.
Rather than passing assets along as part of your estate, you may want to consider gifting assets throughout your lifetime. In 2022, a U.S. citizen can gift up to $164,000 per year tax-free to a non-U.S. citizen spouse without using up any of the lifetime exemption discussed above. An especially effective way to share wealth is by gifting appreciated assets. If the non-citizen spouse lives in a low-tax country, he or she may be able to sell those appreciated assets at a lower capital gains tax rate than is applicable to the U.S. citizen spouse. The non-citizen non-resident spouse, who is not included in their spouse’s U.S. tax filing, may be under no obligation to report their transactions to the IRS. Care should be taken not to incur gift taxes in the country of residence.
#3 – Consider a qualified domestic trust (QDOT).
One of the biggest estate planning challenges faced by U.S. expats with non-citizen spouses occurs when the U.S. citizen spouse passes away first. As noted above, if there’s no qualified domestic trust (QDOT) in place at the time of death, the non-citizen spouse is not entitled to the unlimited spousal exemption allowed to U.S. citizen couples. If the value of the U.S. citizen’s estate exceeds the $12.06 million lifetime exemption (which is set to drop to $6 million in 2026), the use of a QDOT will defer the imposition of U.S. estate taxes until the death of the surviving non-citizen spouse.
A QDOT allows a deceased U.S. citizen’s spouse’s property to be transferred to a trust to support a non-citizen surviving spouse with income as well as expenses related to health, maintenance and welfare. Upon the death of the surviving spouse, the remaining assets pass to the remainder beneficiaries via the estate of the first-to-die spouse (after any necessary taxes have been paid from the estate).
A QDOT may be created by the will of the decedent or can be elected within 27 months following the decedent’s death. The surviving spouse is then treated as the grantor for income tax purposes. It’s important to note that the trustee of the QDOT must be a U.S. citizen or trust company.
Next Steps
With an upcoming wedding on the horizon, you’ve got enough to plan. Let Creative Planning International iron out your financial life. We specialize in helping U.S. expats and cross-border families maximize their wealth and avoid common mistakes, especially when it comes to their taxes and investments. We understand the complex interaction of multi-jurisdiction tax and regulatory regimes and take into account currency, diversification and other portfolio considerations as we help you plan and invest for the future.
If you’re an American engaged to a non-U.S. citizen, request a meeting with a member of our team.
