American expats have a unique appreciation for the challenges faced while living abroad. While making a home in a foreign country offers the chance of adventure and opportunity, it comes at the price of additional obstacles and increased complexity in many aspects of their lives. To further complicate matters, many Americans living abroad marry a non-U.S. spouse and, therefore, must consider important questions to navigate their shared financial futures.
These considerations include the degree to which they integrate or separate their finances, the income and estate tax ramifications U.S.-citizen based taxation has for mixed nationality couples (where only one spouse is a U.S. citizen), and questions concerning a spouse’s eligibility for Social Security benefits and Medicare.
The following outlines important questions for mixed nationality couples to consider when tying the knot.
What filling status should I/we use for a U.S. tax return?
An important decision for mixed nationality couples is determining whether to bring the non-U.S. spouse into the U.S. tax system — a decision that can have just as many benefits as it does consequences.
This is because if a mixed nationality couple lives and works outside the U.S., they’ll have tax obligations in the country where they live as well as tax obligations in the U.S. for the U.S. spouse. U.S. tax filings require a filing status that, depending on what they select, may have considerable impact on their total tax bill.
Here’s a brief review of various filing statuses and their tax implications:
- Married Filing Separately (MFS)
The married filing separately (MFS) tax filing status limits the foreign spouse’s exposure to the U.S. tax system. However, it comes with a few disadvantages. MFS is the most punitive status in terms of income tax brackets as well as the availability of tax credits and deductions (for example, a rapid phaseout of the deductibility for IRA contributions or eligibility to make Roth contributions).
This filing status may be attractive to those who have significant assets overseas and wish to keep the non-U.S. spouse out of the U.S. tax system. It may also be advantageous for couples living in a high-tax jurisdiction, like Switzerland or Portugal, whose foreign tax credits offset their U.S. tax liability.
However, tread with caution. The decision to opt in the nonresident spouse to the U.S. tax system is a once-in-a-lifetime election for both the U.S. and the non-U.S. spouse (even if they later divorce and remarry).
- Married Filing Jointly (MFJ)
Married filing jointly (MFJ) status is most favorable in terms of tax brackets, credits and additional exemptions/higher deductions. The decision to opt in the foreign spouse using this filing means both spouses must report their combined worldwide income. Making this choice does not affect their immigration status — it simply means treating the non-U.S. spouse as a U.S. resident for tax purposes.
Despite the advantages of electing “married filing jointly” status, joint filing status for U.S. tax purposes likely won’t make sense when the non-U.S. spouse is unlikely to relocate to the U.S. in the future, has earned income high above the U.S. foreign earned income exclusion, lives in a low- or no-tax jurisdiction (like Mexico or Saudi Arabia) or owns a considerable amount of the couple’s wealth.
- Head of Household (HOH)
Mixed nationality couples may also qualify to file as head of household (HOH), which can be used as a strategy to take advantage of some U.S. tax benefits while keeping a spouse out of the U.S. tax system. To qualify, you must have paid more than half the cost of maintaining your household and lived with a qualifying person for more than half the year (this qualifying person must be a relative other than your spouse). This filing falls between MFS and MFJ in terms of the amount of relief offered by its tax brackets and available credits/deductions.
To comingle or not to comingle assets?
In general, a U.S. person can own a U.S. bank account or investment account jointly with their foreign spouse. As long as the account is reported under the U.S. person’s Social Security number, the financial institution will provide a 1099 to that spouse, who will report the full amount of income from that account on their tax return. While it’s possible to attribute a portion of the income to the foreign spouse, this creates U.S. tax obligations for the foreign spouse and isn’t recommended without the guidance of a tax professional.
While a foreign spouse may own an individual brokerage account or retirement account in the U.S., their accounts will be subject to federal withholding on dividends and interest, or retirement account distributions of 30%. However, this amount can be lowered (sometimes to zero) for those who are tax residents of a country that has a tax treaty with the U.S. Alternatively, the U.S. spouse can hold all domestic accounts in their name.
There are additional estate and incapacity planning issues to think about when considering account ownership. For example, joint ownership can prove useful in providing a spouse with access/authority over the family financial assets in the event of the death or disability of the other spouse for a U.S. couple.
However, for cross-border couples, there may be substantial administrative requirements that must be satisfied when a surviving joint tenant attempts to control or retitle an account upon the death of another joint tenant. These hurdles may include regulatory/tax requirements (e.g., IRS “transfer certificate” filing requirements for overseas decedents) as well as policies within the financial institution. Ultimately, the steps that the surviving tenant may take will vary depending on the location of death and the particular financial institution.
How will U.S. estate tax affect our accounts?
When it comes to estate planning, your foreign spouse is subject to the same estate tax as a U.S. citizen on their U.S. assets. However, the U.S. person has access to substantial exemptions, including the “unlimited marital deduction,” which grants the ability to transfer an unlimited amount of assets to a U.S. spouse free of estate tax, and the “lifetime exemption amount,” which totals $12.92 million in 2023 and receives an inflation adjustment each year. These two provisions make it easy for a U.S. citizen to exclude a considerable amount of assets from estate tax. U.S. citizens married to nonresident, non-U.S. citizens can’t use the unlimited marital deduction but may still use their full lifetime exemption to pass assets to their foreign spouse, free of estate tax.
If your foreign spouse is neither a U.S. citizen nor a U.S. resident, they’re only allotted a $60,000 exemption on their U.S. assets. The remainder is subject to a steep estate tax bracket that starts at 18% and quickly compresses to 40%. Although nonresident/non-U.S. citizens don’t qualify for the unlimited marital deduction or the full lifetime exemption, they can pass an unlimited amount to a U.S. spouse free of U.S. estate tax.
A non-U.S. citizen who is domiciled in the U.S. qualifies for the same lifetime exemption as a U.S. citizen and is likewise subject to U.S. estate tax on their worldwide assets. The definition of a “U.S. domiciliary” lives in the no-man’s land between U.S. resident and U.S. citizen. It’s a subjective process in which your intent to remain in the U.S. indefinitely is evaluated. Having a green card does not automatically make you a U.S. domicile. Only a U.S. citizen qualifies for both the unlimited marital deduction and the full lifetime exemption.
Will my foreign spouse qualify for U.S. Social Security payments?
In most cases, non-U.S. spouses can claim Social Security benefits by qualifying for survivor or spousal benefits. However, these payments can be suspended if the spouse has lived outside the U.S. for six consecutive calendar months. Thankfully, there are three major exceptions to this rule that could easily qualify a foreign spouse living outside the U.S. to receive benefits based on their spouse’s Social Security record:
- First, non-U.S. citizens may receive Social Security benefits abroad if they lived in the U.S. for at least five (non-consecutive) years as a married couple. If the non-U.S. spouse doesn’t meet the five-year test, they can return to the U.S. and complete the five-year requirement.
- Second, if the spouse is a resident of a country that has a Social Security agreement with the U.S., they’ll be entitled to benefits. Also known as totalization agreements, these agreements help avoid double taxation on Social Security payments and provide clarity as to how foreign spouses can qualify for benefits. If your foreign spouse is a tax resident of one of these countries, the Social Security Administration will continue their benefits.
- Finally, the Social Security Administration will continue a foreign spouse’s benefits if they’re a citizen of a certain country. Unlike the previous requirement, you don’t need to live in one of these countries to receive benefits — you simply need to have citizenship from that country and live in a location the SSA can send payments to. For the latest information, visit ssa.gov/international/countrylist1.htm.
Will my foreign spouse qualify for U.S. Medicare if we move back to the U.S.?
There are a few different ways your foreign spouse can qualify for Medicare, even if they’ve lived their working years abroad. The first and most straightforward way is to become a U.S. green card holder or citizen. Of course, this is easier said than done.
They can also qualify for Medicare under a spouse’s credits at age 65, as long as the qualifying spouse is 62 or older. Alternatively, the foreign spouse can qualify on their own if they’ve lived as a permanent U.S. resident for five consecutive years. However, if not qualifying under a spouse, the NRA spouse would have to pay for Medicare Part A premiums (about $500 per month, currently).
Whether the foreign person qualifies on their own or under a spouse, they won’t receive a late enrollment penalty until they become eligible for Medicare (i.e., if they’re qualifying under a spouse and the spouse doesn’t meet credit requirements until the NRA spouse is over 65, they won’t have a penalty).
There are numerous complex considerations that factor into financial planning decisions for cross-border families that include U.S. and non-U.S. members, and the discussion above merely scratches the surface. With international planning, there is no “one strategy fits all” solution or formula to follow.
Therefore, one of the best ways to avoid common pitfalls is to work with an experienced expat financial advisor who can help you navigate the specific challenges you face as a mixed nationality couple. At Creative Planning International, we understand the complex interactions of multi-jurisdictional tax and regulatory regimes and help expat clients develop efficient retirement and wealth management strategies. Because we serve in a fiduciary capacity, you can be confident we’re acting solely in your best interests.
For more information, contact us at firstname.lastname@example.org to request a meeting with our team.