Mixed Marriages: U.S. Tax Implications for U.S. Citizens Married to German “Aliens”

U.S. citizens living abroad know well that the long arm of U.S. tax law does not end at its border. Not surprisingly, onerous reporting requirements and penalties combined with a convoluted tax code have resulted in an increasing number of renunciations of U.S. citizenship. One of the most egregious and nonsensical IRS requirements applies to U.S. citizens married to “aliens.”

Tax codes around the world recognize that transfers between spouses are non-events with no reporting requirements. U.S. states such as California have codified the concept of community property which recognizes that marital property is held jointly and effectively acknowledges the equal contributions of the married partners to the creation and maintenance of the family unit. Unfortunately, for those U.S. citizens married to “aliens” the Internal Revenue Code (“IRC”) does not afford them the same pragmatic understanding.

Reporting Requirements and Ramifications

With respect to reporting, the IRC requires that U.S. citizens transferring amounts greater than $100,000 report such transfers by filing Form 3520. Such reporting requirements apply to all transfers to aliens including transfers by U.S. citizens. These reporting requirements can apply in a myriad of situations including transfers by U.S. citizens to their nonresident spouses while living abroad or transfers between U.S. citizens to their green card holding spouses while living in the U.S. While the reporting requirements are merely, reporting, such characterizations can have real economic impact. For example, transfers greater than $145,000 to an “alien” spouse could trigger gift taxes at tax rates up to 40% and should an “alien” resident inherit greater than $5.34 million from their U.S. citizen spouse it could trigger inheritance taxes. Simple transactions such as transferring funds between accounts could also trigger gift taxes as they could be characterized as a foreign gift as defined by the IRC.

U.S. –German Tax Treaty

The Convention between Germany and the U.S. for the Avoidance of Double Taxation with respect to Taxes on Estates, Inheritances, and Gifts (“Convention”) can provide some relief for U.S. citizens married to German nationals. However, the issue can turn on domicile and the situs of the assets. Further, the Convention fails to address the issue of Form 3520 and the reporting requirements discussed above. Accordingly, U.S. reporting requirements may apply to any potential transfers between U.S. citizens and their “alien” spouses.

With respect to a bequest received by a German spouse from a decedent not domiciled in the U.S., the Convention could provide relief from the imposition of inheritance taxes. Further, some relief may be available for gift transfers between spouses, but such transfers would depend on the situs of the asset and the domicile of the individuals. In sum, while the Convention may provide for some limited relief from tax it fails to address the onerous U.S. reporting requirements applicable to U.S. citizens married to “aliens.” 

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