Updated: Nov 8
US-Australian couples face a much more complex tax situation than couples who share the same nationality. And the decisions they make regarding their tax residency and tax filing status can have enormous lifetime implications for their financial future.
There are two main decisions that US-Australian couples must make come tax time. These two major decisions are:
Whether to bring the non-US spouse into the US financial system
How to decide who holds what asset(s) in what country
Deciding Whether to Bring the Non-US Spouse Into the US Financial System
The main advantage of opting the non-US spouse into the US tax system is for the couple to enjoy a better tax filing status as married filing jointly. In an effort to encourage most couples to file joint returns, the US extends several tax incentives to couples who do so.
Some of these incentives include a larger standard deduction as well as the possibility of qualifying for multiple tax credits, such as the Earned Income Tax Credit and the Child and Dependent Care Tax Credit. Married couples who file separately face a much lower standard deduction and may be automatically disqualified from receiving those tax credits.
However, benefits associated with filing status should not be the only thing couples consider when determining if they should bring the non-US spouse into the US financial system. Other important considerations include, but are not limited to:
Their existing tax residence statuses in the US and elsewhere
Where the couple currently lives and where the couple plans to retire (intended domicile)
The relative incomes of each member of the couple
Relative wealth holdings (i.e., in whose name assets are held)
Personal attitudes toward marital “sharing”
As their financial advisor, you should plan to cover each of these considerations with your US-Australian couple clients. It’s essential to cover both scenarios (i.e., opting the non-US spouse in or not) for each consideration to help them discover which options will ultimately work best for their financial circumstances now and in the future.
When Not To Opt the Non-US Spouse Into the US Financial System
Despite the advantages of the married filing jointly status, joint filing in the US won’t make sense if the non-US spouse is unlikely to relocate to the US in the future. If they opt into the US financial system as a nonresident alien, but will never enjoy the advantages of being a resident alien or citizen, the long-term consequences may outweigh the benefits of filing jointly.
Additionally, if the non-US spouse is the breadwinner or earns significantly more than the US spouse, their earned income is above the US foreign earned income exclusion (FEIE), and they reside in a low-tax or no-tax jurisdiction, it may be best not to opt them into the US financial system. In this case, the non-US spouse would have to report worldwide earned income to the US, which may be inadvisable if their high income currently has little to no tax liability.
Finally, if the non-US spouse owns a considerable amount of the couple’s wealth, it may not make sense to opt them into the US financial system. This can be particularly relevant if the non-US spouse:
Has a portfolio of Passive Foreign Investment Company (PFIC) investments such as foreign mutual funds or ETFs, unless they plan to sell the PFICs
Is a major shareholder in a foreign corporation which would make that spouse subject to the US controlled foreign corporation (CFC) tax rules
Is the beneficiary of a non-US trust and would be subject to the US foreign trust reporting and tax rules
May receive a significant inheritance or have a large change in their financial situation in the future
Most of these scenarios are punitively taxed by the US, so the advantages inherent to the married filing jointly status may not outweigh the considerable financial liability of subjecting these assets to the US tax system.
Once in a Lifetime Opt-In (IRC 6013(g) election)
The decision to opt-in the nonresident spouse to the U.S. tax system is such an important one because it truly is a once-in-a-lifetime election for both the U.S. and the non-U.S. spouse (even if they divorce and later remarry!). Effectively, the non-US spouse is electing to become a “resident alien” under the Internal Revenue Code (under I.R.C. Sec. 6013(g)).
If the couple does choose to make this decision, they will do so by signing and attaching a statement to their first joint tax return stating that they not only elect to file jointly, but they are also qualified to make that election. A couple qualifies for this election if they are married and neither spouse has ever made the election before (even in a prior marriage).
Determining Who Holds What Asset(s) In Which Country
Given the implications of bringing a non-US citizen into the US tax system, as well as the cost and difficulty of attributing income to a non-US spouse for jointly titled assets, thought and planning needs to go into who holds what asset in which country.
We’ll use an example to illustrate the implications of these decisions. Chris, 52, is an Australian citizen and US permanent resident with a green card. Chris’ husband Pat, 55, is a US citizen and Australian permanent resident. The couple currently lives in New York and have lived together in the U.S. for the past twenty years since Chris obtained her green card. They plan on retiring to Australia within the next 5 years. They have no children.
Chris and Pat own an apartment together that is worth $2,000,000 and is jointly titled. They also own an assortment of taxable investment accounts worth $2,000,000. Some of these accounts are jointly owned and others are individual. Their retirement accounts are worth an additional $2,000,000. Chris expects to receive a company pension of $60,000 per year and both will receive Social Security benefits. Chris also expects to inherit about $3,000,000 from her family.
Chris must now decide whether she will attempt to become a US citizen before leaving the US or surrender her green card once the couple moves to Australia. This decision is especially important in light of the HEART Act. If Chris decides to relinquish her green card, mandates in the HEART Act will require her to be assessed for an exit tax.
Some questions the couple needs to consider include:
Are the benefits of filing their taxes jointly worth the other benefits Chris might obtain by staying out of the US tax system?
Will they sell their apartment before leaving the US?
What is their expected income in retirement, including their retirement account distributions, pension income, and Social Security benefits? (Both the pension and Social Security will be US sources of income in any case)
What will the tax liability be in light of the HEART Act exit tax?
Even though Chris expects a large inheritance in the future, other characteristics of the couple’s financial situation, such as the fact that both own considerable US assets jointly make it unlikely that it would be financially beneficial for Chris to permanently exit the US tax system when the couple moves to Australia.
With the present structure the couple has regarding asset and account ownership, they will likely be subject to an exit tax if Chris abandons her green card, although this depends on the amount of gain the couple experiences on the sale of their home and other stocks.
Although the couple may not be able to eliminate Chris’ status as a covered expat, there are strategies they can use to optimize their tax situation. By implementing a few changes to their financial circumstances, such as selling their home shortly before leaving the US and retitling or gifting joint assets to Pat, they may be able to substantially reduce the size of the exit tax.
The complexity of Chris and Pat’s situation illustrates why it’s critical to examine all relevant factors of a couple’s financial situation before helping them make a decision.
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Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.