In this piece, I wanted to provide some explanation and guidance around gifting assets to a non-U.S. spouse. 

This can often happen due to an intentional tax planning strategy or the tax implications could be a byproduct of a real-life necessity. Either way, it is important to make sure the U.S. tax requirements are considered in order to avoid unnecessary costs and penalties.

What is a gift and what are the general IRS rules?

A gift has a very specific definition for U.S. tax purposes. In general, the transfer of an asset (i.e., money) from one person to another can be classified as one of 3 things: (1) a sale, (2) a loan, or (3) a gift.

The IRS defines a gift as any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return. In other words, where you give something of value to someone else without receiving something back of equal value. What we are talking about here, as a simple example, is where one spouse gives cash to the other or shares in a company to the other.

For federal tax purposes, gifts are not taxable income for the recipient. The donor (giver) can give up to $16,000 per year to any number of recipients without triggering a gift tax or reporting requirement. There is also a lifetime exemption of $12.06 million per individual for gifts exceeding this amount. If gifts exceed the annual exclusion, the giver may need to file a gift tax return with the IRS, but gift taxes are typically only owed when cumulative gifts exceed the lifetime exemption.

The donor is required to file Form-709 with the IRS to report the gift whenever the value exceeds the $16,000 exemption (even if it is not taxable). Said differently, the only situation where you have no reporting requirement, is when the value of the gift is less than $16,000.

Gifts between spouses have a unique exemption however called the “unlimited marital deduction”. With this deduction, gifts between two U.S. tax-resident spouses are completely exempted from gift tax reporting and lifetime exclusion regardless of the amount.

How is it different when one spouse is not a U.S. tax resident?

As always, the rules change when things get international. In particular, the marital deduction just described does not apply when making a gift to a nonresident spouse... there is a separate rule.

The annual exclusion for gifts to a nonresident spouse falls back to the general rule, however, instead of a $16,000 exemption you are allowed a $159,000 exemption. Anything above that applies against the $12.06 million lifetime estate exemption described before.

So in this case, if you keep the value of your gift below the $159K... you have no reporting requirement. If you exceed that value, you will need to file Form-709 to report the value of the gift and apply it against the lifetime estate exemption.

In conclusion.  Gifting to a nonresident spouse can often be a good tax planning strategy, if nothing else, to minimize reporting requirements to the IRS each year.

As with most financial moves when the IRS is involved, it is important to do it right the first time to avoid unnecessary costs and complications.

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