If you are a non-citizen spouse of a U.S. citizen, and you are a resident taxpayer in the United States, the tax implications for inheritances and gifts you receive from your citizen spouse, or even from other family and/or friends in the United States or India may be less advantageous than for citizens. On the other hand, non-citizen spouses do have certain rights they should be aware of, for example, spousal IRA accounts, and sometimes not being a citizen or green card holder can have its advantages.
Gifting/Inheritance Rules are Disadvantageous For a Non-US Citizen
The unlimited marital allowance for gifts and/or inheritance from a U.S. citizen to a non-citizen spouse does not exist as it does for married American citizens. While living, the maximum annual gift to a non-citizen spouse from a citizen spouse without taxes in 2011 is $136,000. Additional annual gifts of up to the annual exclusion amount ($13,000 for 2011), can be made to a non-citizen spouse without gift tax. No restrictions on transfers from resident alien (non-citizen) spouse to citizen spouses apply, but if the amount is over $100,000, form 3520 must be filed with the IRS in order to avoid penalties.
The non-citizen spouse can, however, possibly avoid or delay the estate tax through a QDOT trust which can even be done post- mortem in some cases. A filing can be made for an extension or U.S. citizenship can be applied for. Obviously this is in the extreme case and it would be smarter to have the trust in place well in advance.
Sometimes Not Having a Green Card or Citizenship is a Benefit
If you do hold one of those, you will be subject to the thorny issues of the U.S. tax code for as long as you hold one of these –even if you return to India and permanently reside there.
If you are a long-term green card holder (meaning for 8 out of the last 15 years) who officially leaves the United States, you may first have to pay exit tax to relinquish your green card or citizenship. So if you are a non-citizen spouse without a green card or citizenship, it may be one less worry down the line if you return to India.
Take Advantage of the Spousal IRA
A non-working spouse may want to consider contributing the maximum annually to a spousal IRA ($5,000 in 2011 or $6,000 for those over 50 years of age) for the tax benefits and to build up some savings for retirement in the absence of a 401K plan or other. A non-working spouse who is a U.S. resident and taxpayer, even non-citizen, can contribute to an IRA as long the working spouse is earning at least the amount of the contribution. Be sure to check on the tax deductibility status of all contributions, which can depend on the family’s total income as well the availability of other retirement plans for the spouse.
Even Non-citizens Have Obligations as U.S. Taxpayers and Residents
You must file a Report of Foreign Bank and Financial Accounts (FBAR), file your U.S. taxes (most likely in a joint return with your spouse), and watch out for the PFIC traps (see below).
The FBAR is mandatory for any person in the United States (e.g. resident or citizen) that holds a financial interest in, or signature or other authority over any financial account(s) in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. This includes U.S. citizens residing outside the United States. This information must be reported each calendar year by filing the FBAR report with the Department of the Treasury on or before June 30 of the succeeding year.
File Your Taxes Properly and On Time
U.S. taxpayers are required to report their worldwide income. File U.S. taxes including all worldwide income, even from India, and include tax credits for taxes paid in India. This may be advantageous for you in some cases. Don’t forget to file taxes in India if you need to (likely, if you hold investments there).
Avoid PFIC Traps.
Avoid the following investments in India or outside the U.S. until you are no longer a U.S. taxpayer. They expose you to rules governing Passive Foreign Investment Companies (PFICs) which can cause you to pay increased taxes and render your tax filing expensive and complex (assuming your accountant knows what this means, how to do it and agrees to do it.)
PFIC Investments to avoid in India:
• Mutual Funds
• ETFs
• ULIPs
Have a Valid, Up-to-date Will or Trust For Your U.S. Concerns.
Make sure it contains directives concerning your health and care of dependents such as children. Otherwise the federal and/or state government may make these decisions for you.
These issues may be decided by federal laws or the laws in the jurisdiction of where the property is located, generally the place of residence where the estate is settled, though the jurisdiction where physical property lies often gets the first “tax bite.” We recommend you consult a lawyer to assist you. Don’t forget to have the same in India for assets there.
If for some reason the non-citizen spouse is a non-resident alien, for example, living in India and only occasionally in the United States, then the taxation rules are different, and can be more disadvantageous in terms of gifting and inheritance.
Ariadne Horstman is an investment advisor representative at www.investmentyogi.com. She specializes in Indian/cross-border investments and can be reached at ariadne@investmentyogi.com.