This post is based on a response to a comment at the Isaac Brock Society which included:
@victoria & other Uk people: the talk looks great, but I went to an earlier one via my alumni association. I went because my mother kept on running across snippets in the Wall Street Journal about how non-US spouses caused tax problems. Normally, I wouldn’t go to a talk with estate planning in the title and most of the audience seemed wealthy (I checked a table and the 40% tax rate for estates applies to a fairly large estate, but it is 35% no matter what. My one concern about the London talk is that there is a really complicated UK side to this as well. I have read some blogs where people recommend US mutual funds for US citizens in the UK and that is simply wrong: at present unless it is in an IRA the tax is horrendous.
The response to the comment was:
@Vote in the 2014 U.S. primary
I note with particular interest this part of your comment:
“I went because my mother kept on running across snippets in the Wall Street Journal about how non-US spouses caused tax problems.”
Sorry but you have actually got this COMPLETELY WRONG!
It’s the exact opposite.
It’s the U.S. spouse that is causing the tax problem.
Let me repeat that:
It’s the U.S. spouse that is causing the tax problem.
In what I would call “The FBAR Marriage” the U.S. spouse, by virtue of being a U.S. person, causes damage BOTH to:
1. The non-U.S. spouse; and
2. To the U.S. person himself.
Re 1: Damage to the non-U.S. spouse
Because he/she is married to a U.S. person. the non-U.S. spouse has to deal with disabilities, that include, but are NOT limited to the following:
– finances invaded through FBAR, FATCA, and other reporting requirements
– chained to a spouse that is disabled from normal retirement planning vehicles in the country of residence
– an inability to inherit the estate of the U.S. spouse because the normal marital deduction does not apply
– the incredible extra expenses and stress of U.S. tax filings
Re 2: Damage to the U.S. Spouse
Obviously any U.S. person with a shred of integrity would want to protect the non-U.S. spouse from the U.S. tax system. This means he/she must file under the box of:
“married filing separately”
As severe punishment for “married filing separately” the thresholds for exemptions from various taxes (including the new Obamacare investment surtax) are capped at $125,000.
Contrast that with an threshold of $400,000 for “single filers” and $450,000 for “married filing jointly”.
In other words, the U.S. spouse is severely punished under U.S. tax law for protecting the non-U.S. spouse.
As one commenter recently put it:
“The USG simply hates extra-territorial dating/mating. The higher tax rate is a way to punish us though for not coercing our spouses into filing jointly so they too can be USP’s for taxable purposes. They see our marriages as tax evasion and while I would rule out entirely that someone somewhere at sometime may have married a non-USC for that purpose, I seriously doubt that the percentage of “mixed” marriages have tax issues to thank for their existences.”
Although I agree that U.S. persons do not marry “aliens” as a form of tax evasion, I think it is very very likely that U.S. persons will NOT be able to find marriage partners outside the Homeland for much longer.
Want more info on the FBAR Marriage and why it should be avoided?
The interesting reply to my comment was:
You are right about what the situation is. The articles were hopelessly vague. My mother told me that non-US spouses caused problems because that is what she was understanding. The articles themselves provided no useful specifics, just advice to talk a tax advisor.
I don’t think that awareness of FATCA is widespread enough to prevent other people from marrying U.S. citizens, since most people don’t organize their life around taxation. Unfortunately, there are a number of nasty gotchas in store for those who are insufficiently aware of the potential problems caused for the non-U.S. surviving spouse by joint ownership of the house instead of owning specific percentages, by pensions with a specified value, and by insurance taken out in the U.S. person’s name. I almost died a few years ago and am shocked by how much of a hit my young family could have taken. Ironically, the laws are encouraging me to transfer assets to my non-US spouse, but for me the legal limits ($143,000 last year) aren’t at all constraining.
You are correct about the problems for those who earn $125,000 and over, but I think that more attention needs to be given to the fact that there are problems for those under $125,000 as well. I don’t earn that much and have noticed that many examples of the bad effects of U.S. taxation of overseas Americans deal with people who are really wealthy. I can understand why tax consultants do this, since they want to attract high net worth clients, but it creates the impression that U.S. tax policy on overseas Americans only affects the wealthy, which is definitely not true. I suspect that this misunderstanding is why the tax talk I went to, which was free to alumni, only attracted very expensively dressed people (the one exception turned out to be a hedge fund manager who had been to several such talks!).
I am getting jaded. Yesterday I noticed that the government wanted to encourage college students to study in Latin America and my first thought was that they shouldn’t fall in love!