Marrying a non-U.S. resident and moving? When that move is international, and only one of you is a U.S. person, you may need to change your (tax) relationship status to: “it’s complicated.”

Tax considerations for U.S. and Non U.S. Spouses

The following are considerations for couples with one U.S. person and one non-U.S. person:

• Business ownership
• Foreign financial accounts and other financial assets
• Foreign pension and retirement savings accounts
• Investments
• Home ownership and mortgage
• Balancing assets between spouses to optimize differences in taxation

Example

For example, Chris, a U.S. citizen, meets Andreas, a Swiss citizen. Chris moves to Switzerland and they later get married. Even though Chris lives abroad, U.S. citizens file U.S. tax return(s) on their worldwide income and foreign financial assets no matter where they live.

Let’s dive into their tax obligations

Form 5471 – Information Return of U.S. Person with Respect to Certain Foreign Corporations - Andreas owns a corporation in Switzerland. Even though there is no direct ownership by Chris, due to their marital status, Chris may need to file a form 5471 to report constructive ownership in a foreign corporation.

Form 114 – Report of Foreign Bank and Financial Accounts (FBAR) - If the balances of non- U.S. accounts are above certain thresholds, Chris may need to report his bank and other financial accounts, including naming Andreas as the co-owner of their jointly owned accounts when filing the report of Foreign Bank and Financial Assets (FBAR) and on form 8938 along with the annual tax return.

Foreign Pensions - Chris’ pension plan (Pillar II) in Switzerland will not be treated the same as it would be if he and his employer were contributing to a 401k. The U.S. and Switzerland do not have a treaty that recognizes Chris’ Swiss Pillar II so the employer and employee contributions will be included in Chris’ wages. For Swiss tax purposes, these contributions will be deducted from the taxable wages.

Form 8621 - Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund - Chris will want to use caution when investing; pooled investments like ETFs that are organized outside the U.S. can be taxed harshly under the PFIC regime on form 8621.

Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts - Non- U.S. retirement savings accounts may need to be treated as foreign trusts subject to additional reporting on form 3520 or form 3520-A.

In Switzerland Chris and Andreas will file a joint tax return. Chris may need to calculate his share of the foreign taxes so he can claim them as foreign tax credits on the U.S. return.

Should they decide to buy a home together, Chris will need to keep track of the purchase, sale, and mortgage in USD. Fluctuations in the Swiss Franc to the U.S. Dollar can result in a gain in one currency and a loss in the other. The IRS is also concerned that U.S. taxpayers do not pay back less in USD than they loaned in USD which can result in tax on phantom foreign currency gain.

Finally, Chris and Andreas may be able to take advantage of certain tax planning opportunities. Switzerland does not tax capital gains, Chris may be able to gift appreciated stock, ETFs and other investments to Andreas who can realize those gains with no U.S. tax consequences (though Chris may need to file a gift tax return if the value of the assets is over a certain threshold.)

The considerations above account for Chris filing the U.S. tax return with a filing status of Married Filing Separately. In the next post, we’ll discuss the benefits and consequences of bringing Andreas into the U.S. filing, even if Andreas is not a U.S. person.

Questions? Contact us.