If you are US citizen married to a citizen of a foreign country, deciding whether your spouse should go through the process of obtaining US citizenship (known as “naturalization”) requires careful assessment of a wide range of personal, family, legal, and financial considerations. Taxes and estate planning are two areas where all of these considerations tend to blend together, and they should weigh heavily in you and your spouse’s decision about whether your spouse should seek citizenship in the United States.
Naturalization of a Non-US Citizen Spouse: Tax Considerations
We’ll start with taxes. First, it is important to note that the fact that your wife is a non-citizen of the US does not mean that she has no obligations to the Internal Revenue Service (IRS). If your wife earns income in the US (and potentially abroad), she must pay federal income taxes, and she and you both must be sure to make the correct elections on your federal returns. Depending on the state in which you live, you and your spouse may be liable for state income taxes, as well.
Let’s look at some common scenarios:
If You Live in the United States…
If your wife currently lives with you in the United States as a resident alien, then she is taxed just like a US citizen. You must list your spouse on your federal tax return, and you must report her worldwide income in accordance with the Internal Revenue Code.
If you live in the US but your wife is a non-resident alien, you generally have two options: (i) you can elect for resident alien treatment and file a joint return; or, (ii) you can file with a status of “married filing separately,” in which case you can only claim an exemption for your wife if she has not earned any US income.
If You Live Abroad…
If you and your wife both live abroad, you each may still have obligations to the IRS. As a US citizen, you must report your worldwide income; and, if your wife has a green card, she will still be treated as a resident alien for tax purposes even though she lives with you overseas.
If you live together abroad and your wife is considered a non-resident of the US (i.e., she does not have a green card), then your situation is different. The tax laws of your country of residence may apply; if that country has a tax treaty with the US, this could impact you and your spouse’s tax filing status, as well.
Benefits and Drawbacks of Filing Jointly as US Citizens
As you can see just from these simple examples, tax issues can quickly get complicated when one spouse is a non-US citizen. This alone can be enough to counsel in favor of electing for US citizenship (assuming your wife otherwise meets the eligibility requirements). However, being able to file as married US citizens can have a number of other tax benefits as well. For example:
- If your spouse has significant medical expenses or owns a business that is losing money, you may be able to use these to offset some of your income to reduce your overall tax liability.
- If your wife is employed, you may be able to mix-and-match your job benefits in order to achieve tax savings on your joint return.
- If your wife is not employed, she may still be able to contribute to an individual retirement account (IRA), which offers tax benefits that you can enjoy jointly.
- Filing jointly allows married couples to increase their charitable contribution deductions.
Keep in mind, however, that these benefits may also be available to US citizens with non-citizen spouses under certain circumstances. In addition, since we’re talking about taxes and the IRS, these benefits come with some downsides.
For example, filing jointly may cause you to become ineligible for certain exemptions and deductions that you could have claimed at your individual income level. Filing jointly also means that you become jointly liable for any errors in your spouse’s reported income.
Of course, income tax is not the only tax that comes into play. One of the other major tax considerations is the estate tax, which we will get into below.
Naturalization of a Non-US Citizen Spouse: Estate Planning Considerations
The Unlimited (US) Spousal Exemption for Estate Tax
With respect to estate planning, one of the primary concerns (and one of the primary reasons for having an estate plan) is to minimize your estate tax liability. You want your spouse and loved ones to receive as much of your estate as possible, and this means structuring a plan that limits your estate’s obligations to the government.
In this regard, being married to a US citizen can have substantial benefits. There is a blanket spousal exemption to the estate tax: If you are married, your entire estate can transfer to your spouse without triggering estate tax liability. However, this exemption is only available if both spouses are citizens of the United States.
Other Estate Planning Benefits of US Citizenship
Being married to a US citizen can have other estate planning benefits, as well. For example, as we have previously discussed, multi-jurisdictional estate planning can be complicated. Different laws can apply to different assets, and having a spouse who is a non-US citizen adds another layer of complexity to the equation. What country’s laws govern your spouse’s estate? How do those laws differ from the (presumably US, though not necessarily) laws that apply to yours? If your wife is not a US citizen, what does this mean when it comes time to pass on your accumulated wealth to future generations?
Estate Planning Alternatives to US Citizenship
While being married to a US citizen can help resolve these types of questions, it is important to note that citizenship is not the only option. In fact, there are a number of estate planning strategies and tools that we specifically recommend to multinational couples. For example:
- Qualified Domestic Trust (QDOT) – The qualified domestic trust (QDOT) is a type of irrevocable trust that directly addresses the potential estate tax burden facing couples in which only one spouse is a US citizen. However, a QDOT defers estate tax liability – it does not eliminate it entirely.
- Irrevocable Life Insurance Trust (ILIT) – By setting up an irrevocable life insurance trust (ILIT), you can ensure that your non-citizen spouse will receive death benefits free of estate tax. The trust structure is critical here – direct payment of life insurance proceeds can trigger estate tax liability.
- Lifetime Giving – US citizens can make lifetime gifts to non-citizen spouses valued at up to $148,000 per year without incurring a tax obligation. If you plan ahead, you may be able to gift your entire estate to your spouse during your lifetime, or at least enough of it to reduce the value of your estate below the threshold for estate tax liability.
For more on estate planning when married to a foreign citizen, you can read: How to Plan Your Estate When Married to a Non-US Citizen.
Schedule a Consultation ta Jiah Kim & Associates
If you would like more information about the tax and estate planning benefits of US citizenship and the alternatives you may have available, contact Jiah Kim & Associates for an initial consultation. Call us at (646) 389-5065 or inquire online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.