Cross-Border Spouses: Beware of U.S. Gift-Tax Surprises

Whenever a U.S. citizen or U.S. resident alien is married with a Canadian spouse who is not a U.S. citizen, then property transfers involving the spouses might be taxable in the United States or subject to U.S. gift-tax rules. Most Canadians are not familiar with a present tax or even an estate tax because Canada doesn’t have such taxes. Inside the United States, however, gift and estate taxes exist alongside regular income tax, which enable it to run up to 40% with the worth of a U.S. taxpayer’s wealth on the certain quantity. Inter-spousal transfers can happen by way of a gift, a sale or incident into a divorce. For U.S. tax purposes, a gift is treated being a transfer of property without receiving full consideration in return. For maried people where both spouses are U.S. citizens, transfers are not subject to regular taxes or gift tax. But problems arise when one spouses are not U.S. citizens.

Sale of property to a spouse If both spouses may be U.S. citizens or U.S. tax residents, then an inter-spousal transfer by sale or divorce is tax-free. If, however, one spouse is a non-resident alien for tax purposes, then your transferring spouse will recognize a gain or loss for U.S. tax purposes. Gift of property to some spouse When one spouse is not an U.S. citizen, then U.S. gift-tax rules could apply. Unlike the unlimited marital gift tax deduction applicable to U.S. citizen spouses, a present to some non-citizen spouse is merely exempt from gift tax around $147,000 (for 2015). This rule applies in spite of whetherthe receiving spouse is often a green-card holder or otherwise a U.S. tax resident. As a result, care must be delivered to analyze transactions between spouses to discover whether something special income tax return has to be filed to spend any gift tax. Let’s examine a good example of once this situation would apply. Neil Youngman is an American citizen living in Malibu, Calif., and the wife, Cinnamon, is a Canadian citizen living in Toronto. Neil can be a musical legend. Because Neil features a Heart of Gold, he decides to offer his Canadian wife a gift of $500,000 to buy a house Down Through the River in Muskoka. Unfortunately for Neil, only $147,000 of the gift is tax-free. The remaining $353,000 will need to be reported on a gift tax return, which is subject to gift tax. As you can tell, unable to prepare yourself for spousal transfers could leave you afoul of complex tax rules-and subject one to unexpected tax surprises. Marc Gedeon is a CPA (U.S), CPA (Canada) and Tax Attorney at Cardinal Point, a cross-border wealth management organization with offices within the United States and Canada. Marc focuses primarily on providing tax and estate planning for us citizens, tax, transition, and estate planning services. www.cardinalpointwealth.com This piece is for informational purposes only and should not be considered legal or tax advice. Online readers shouldn't solve this info without seeking professional counsel.