A gift to a foreign spouse, under the right circumstances, can play an effective role in long-term estate planning as well as current income tax return optimization.
For instance, gifts can reduce the adverse tax consequences associated with, among others:
- U.S. estate tax upon the death of a U.S. spouse
- U.S. income tax on the sale of appreciated property, such as a residence
- U.S. exit tax upon the renunciation of U.S. citizenship
Despite the various benefits strategic gifting may bring, couples should be aware of the tax and reporting implications. In this regard, the U.S. income tax and gift tax rules can apply very differently depending on the tax profiles of you and your spouse.
In this blog, we explore the income and gift tax implications in the case of gifts from a U.S. citizen expat to a non-US spouse.
US Gift Tax on Gifts to a Foreign Spouse
To understand the gift tax implications of gifts from a U.S. citizen to a foreign spouse, it’s best to begin with some background on the U.S. gift tax.
The U.S. gift tax more or less acts as the backstop to the estate tax, which is a tax on the transfer of your property at death. In general, the estate tax is a tax up to the rate of 40%, which applies to all property owned by a U.S. citizen at the time of death.
A U.S. citizen can currently shield up to $11.58 million of property from the estate tax, the amount of which is decreased for each gift given during the individual’s lifetime (the so-called gift/estate lifetime exemption). While the lifetime exemption shields a U.S. person from gift or estate tax, it does not shield the U.S. person from gift tax reporting, unless an additional exclusion applies.
In this regard, a U.S. citizen can gift an unlimited amount of property to a U.S. citizen spouse without triggering the gift tax or gift tax reporting. In contrast, a gift to a non-US spouse is subject to an annual exclusion limitation amount ($157,000 in 2020), which means that gifts above this amount will be subject to gift tax reporting and will decrease the gift/estate lifetime exemption, but should not trigger actual gift tax until the gift/estate lifetime exemption threshold is passed.
US Income Tax on Gifts to a Foreign Spouse
In general, gifts from a U.S. citizen to a non-US spouse should not trigger federal income tax, since a gift is a non-event for tax purposes.
Several years ago, the U.S. Tax Court clarified that even in the case of a gift of appreciated property to a foreign spouse, U.S. tax should not be triggered on the built-in gain in the property, since the gift is considered a non-event for tax purposes. See Hughes, Ian D., (2015) TC Memo 2015-89, RIA TC Memo ¶2015-089.
We do note that are special circumstances where a gift can arguably trigger U.S. income tax, including for instance:
- A gift of an interest in a foreign company that is a passive foreign investment company (PFIC)
- A gift of real estate property that has a mortgage attached to it
- An inter-spousal exchange of property incident to a divorce
We caveat that the above represents a very brief overview of the estate and gift tax considerations associated with particular types of gifts.
If you are planning to gift property to your foreign spouse, you should consult with a tax advisor to ensure you understand the full tax implications as well as the tax reporting requirements that may be associated with your gift.
