"Generally speaking, financial transactions between spouses are non-events for tax purposes. A married couple is a single economic unit, so moving an asset from one spouse to the other is like moving a $20 bill from your left pocket to your right. No gift tax. No estate tax for assets left to the surviving spouse. And no capital gains tax: these transfers are not sales. But this does not apply if one spouse is an alien.
An American receiving gifts or inheritances of more than $100,000 from a non-resident alien (even his or her spouse!) must file Form 3520. The IRS does not want tax; the gift or inheritance is tax-free. No, the IRS just wants you to flag the gifts you received, because sometimes people try to make taxable income look like tax-free gifts. If you are late or do not file, the penalty can be as much as 25% of the gift or inheritance you receive but do not report. Frequent examples include:
- Your non-citizen spouse dies and leaves you everything. “Everything” might not be much, but if it is over $100,000, you had better file Form 3520. In the normal situation (two U.S. spouses), nothing would be filed with the IRS at all.
- Your non-citizen spouse buys a house with his money and adds you on the deed as a co-owner using the familiar “joint tenants with right of survivorship” method. This is what married couples do, after all. You did not receive a gift that would be reported on Form 3520.
- Your non-citizen spouse opens a bank account and adds you to the account. You withdraw more than $100,000. Are you in Form 3520 filing territory? Well, maybe—not by being added to the account, but by withdrawing the money.
Meanwhile, transfers by Americans to non-citizens can be downright treacherous. Consider the common situation of a U.S. citizen married to a Green Card holder living in the U.S.:
- Transfers to the Green Card-holding spouse are taxable gifts. The first $145,000 per year is tax-free (as of 2014) but they are taxable above that; the tax rate caps out at 40%.
- If you pass away, assets left to your non-citizen surviving spouse are taxable. The first $5.34 million (as of 2014) of lifetime gifts plus transfers at death can help eliminate tax, but above that amount, estate tax will be due; again, the tax rate goes up to 40%.
Even divorces become complicated. When divorcing couples divide up their assets, one spouse will get all of one asset and the other will get sole ownership of another asset. You get the house worth $1,000,000, and I get stocks and bonds worth $1,000,000. We end up equal.
When both spouses are citizens, this is not taxable. If one spouse is a non-citizen, however, this is treated as a pair of sales: I sold you my half of the house (and I will pay capital gains tax), while you sold me your half of the stocks and bonds (and you will pay capital gains tax). We might not end up equal, and we are both poorer than we were before—we shared the property settlement with Uncle Sam.
If your spouse is an alien, you live in a garden of “gotchas.” Don’t trust your instinct. The tax rules are different for you.
- Christina Gandolfo
Philip D. W. Hodgen is an international tax lawyer and founder of HodgenLaw PC, based in Pasadena, Calif.
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