Sure it sounds glamorous, the thought of marrying one of those rugged axe swinging, hockey playing, beer drinking, manly men from up north (and, no, I’m not talking about myself!) Although you may think it’s too much to resist, here are a few reasons why you should probably think twice, especially if you’ve already established some wealth.
- Gifts to your spouse are tax-free, right? Not so fast if your spouse is not a U.S. citizen. In 2015, the maximum annual amount you can gift to a non-citizen spouse is $147,000 (plus the annual exclusion amount of $14,000). That Lamborghini, yacht, or private jet you were looking to give for your spouse’s birthday just won’t happen, unless you’re comfortable paying the gift taxes due as well!
- Assets left to a spouse are always estate tax-free, right? Wrong again if your spouse is not a U.S. citizen. In 2015, non-citizen spouses do not enjoy the privilege of an unlimited marital deduction like their citizen counterparts do. Non-citizen spouses are subject to the same $5.43 million limit that any other non-spouse recipient would be. This becomes a big issue when you consider the estate tax rate goes from 0% to 40% very quickly. That means a loss of nearly half of every dollar above the $5.43 million limit!
- Having a spouse is a guaranteed income tax-exemption, right? That depends, once again, on whether your spouse is a citizen or not. If your spouse is a non-citizen, they must meet what the IRS calls the “substantial presence test” to qualify as a resident for tax purposes. This means they were living in the United States for at least 31 days of the year, and at least 183 days during the three-year period that includes the current year. If they meet these requirements, they are classified as a resident alien for tax purposes and, therefore, qualify for inclusion as an exemption. Alternatively, if the non-citizen spouse has a “green card,” they automatically qualify as a resident alien and the tax exemption is allowed.
If you need more than the aforementioned reasons to avoid marrying a Canadian, I’m sure my wife would be willing to help; you may want to pull up a chair and make yourself comfortable though. For those of you who’ve already walked down the aisle with an international spouse, here are some possible ways to lessen the tax burden of your decision:
- Have your spouse study up on this great country and gain their citizenship.
- Work to reduce your taxable estate by taking full advantage of the allowable gifts previously mentioned. Over a period of time, annual gifts of $147,000 can add up to a significant sum.
- Consider a Qualified Domestic Trust or “QDOT.” A QDOT will not eliminate any estate taxes due, but it will defer them until your surviving non-citizen spouse takes the money out or dies. The beauty of this strategy is that it could defer the taxes long enough for your spouse to become a citizen, at which point the deferred estate taxes disappear! This is a complex tool that will require the assistance of a qualified attorney.
This list of issues and solutions is far from exhaustive, and I might add, has not delved into the many incredible benefits of marrying a Canadian, there is simply not enough room to write them all. As always, if Waller Financial Planning Group can provide any assistance at all, don’t hesitate to contact us!