# Non-American spouse and avoiding PFIC taxation



## parti_sapphire

I'm an American living in France for a few years, recently married to a European with no connection or legal status in the US. I have a few questions related to choosing how to file with my new partner, and how to set up some financial accounts.

I understand our/my US filing options are 1) Non-resident alien (Married Filing Separately, so I only get standard deduction, but partner doesn't need to to file anything with the US = nice); 2) Resident Alien (Married Filing Jointly, so we get double the standard deduction, but partner has to file her income, FBAR, etc).

Additional background: My partner won't earn much money for the forseeable future, and we'll both be living off of my US investments/savings for a few years.

We are considering opening an _assurance vie _under her name, funded by my employment income. We'll only keep the _assurance vie _open for a few years, before selling with some minimal c.1% p.a. risk-free gains (_fonds euros_).

A few questions that arise from this:

1) Can I just transfer (ie give) my spouse money to fund her _assurance vie_, with no tax obligations on the transfer? Assume I earned 100% of this money while we were married.

2) If the _assurance vie _were under my name, it would qualify as PFIC, and I'll have to pay the really high tax rate on such instruments, plus file a Form 8621. If, however, it's under her name exclusively, can we avoid the US taxation? Is there any caveat because the initial funding source of the _assurance vie_ is my employment (and I'm an American)?

3) Does standard deduction, or Married standard deduction, apply to the US investment gains that we'll be living off of for the next few years?

4) Is there anything preventing us from starting with one status - Married Filing Separately - and then changing that to Married Filing Jointly in one or two years?

Thank you so much to everyone on this forum. You've already helped me so much with the questions that led up to the above. And best of luck to all the American expats trying to navigate all these rules!!

- Parti Sapphire


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## Bevdeforges

As long as you are resident in France, I'd advise going the Married, filing separately route - and keeping financial assets in one name or the other. That way only your income is any business at all of the IRS. And quick answers to you questions. (I'm sure you'll get other points of view or ideas.) You may want to consider which marital regime you have here in France (it's based on where and when you got married and if you elected to file a "contract" to have any regime other than the "default" one). While I don't think the IRS really gives a fig about your "regime" it can be handy to be on the "separation de biens" regime if you are planning to keep assets in separate names. Depends on what your future plans might be.

1) Basically, as long as the money was declared by you as it was earned, there should be no tax issues if you are giving it to your NRA spouse. (Or if there are, there is no way the IRS is ever going to hear anything about it.)

2) If it's in her name, it's hers. I seem to recall some limitations of amounts that can be gifted or transferred to a foreign spouse - but that's gift tax, and usually that sort of thing isn't subject to taxation until you die. Do a search on "gifts between spouses US taxes" to see the specifics, but you should be OK if you limit your gifts to $164,000 a year.

3) Depends a little bit on your income level and if you've got any "earned income" in the deal that might interest you in taking the FEIE to exclude your salary or wage income. But in any event, the standard deduction will apply against the investment income.

4) Check Publication 54 for details, but they describe the option to file jointly even if one partner is an NRA. You can change the election as often as you like - but be aware that your partner will need an ITIN if she doesn't have a US SSN. ITINs are now renewable every few years, and I think there may be a small charge for them. With as backed up as the IRS is these days, just be sure to figure in plenty of time for obtaining or renewing an ITIN.


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## parti_sapphire

Bevdeforges said:


> As long as you are resident in France, I'd advise going the Married, filing separately route - and keeping financial assets in one name or the other. That way only your income is any business at all of the IRS. And quick answers to you questions. (I'm sure you'll get other points of view or ideas.) You may want to consider which marital regime you have here in France (it's based on where and when you got married and if you elected to file a "contract" to have any regime other than the "default" one). While I don't think the IRS really gives a fig about your "regime" it can be handy to be on the "separation de biens" regime if you are planning to keep assets in separate names. Depends on what your future plans might be.
> 
> 1) Basically, as long as the money was declared by you as it was earned, there should be no tax issues if you are giving it to your NRA spouse. (Or if there are, there is no way the IRS is ever going to hear anything about it.)
> 
> 2) If it's in her name, it's hers. I seem to recall some limitations of amounts that can be gifted or transferred to a foreign spouse - but that's gift tax, and usually that sort of thing isn't subject to taxation until you die. Do a search on "gifts between spouses US taxes" to see the specifics, but you should be OK if you limit your gifts to $164,000 a year.
> 
> 3) Depends a little bit on your income level and if you've got any "earned income" in the deal that might interest you in taking the FEIE to exclude your salary or wage income. But in any event, the standard deduction will apply against the investment income.
> 
> 4) Check Publication 54 for details, but they describe the option to file jointly even if one partner is an NRA. You can change the election as often as you like - but be aware that your partner will need an ITIN if she doesn't have a US SSN. ITINs are now renewable every few years, and I think there may be a small charge for them. With as backed up as the IRS is these days, just be sure to figure in plenty of time for obtaining or renewing an ITIN.


Much appreciated Bev.

Great shout on the marital regime; I hadn't looked into that at all because we were actually married outside of France. Worth looking into.

On 2) it seems you're right that there is a limit when it comes to gifts to foreign spouses - $159K per this source. That's actually less than I need to transfer to my partner, so could be problematic. But it seems in contradiction with how you responded to point 1), about how the IRS doesn't care or even know as long as I dutifully filed my taxes upon earning those funds. Maybe there's a difference between just transferring money from my account to hers (okay, unlimited) and something that qualifies as a "gift" (limited to $159K)?

3) Ah yes, I'm remembering this now. Previously I was above the $108,700 FEIE exclusion limit, but going forward I we won't be - gains on investment sales will be less than that, probably in the $40-50K p.a. in gains. So I think we'll go for FEIE. For the benefit of the forum, is there a rule of thumb for the break point when you should go for FEIE vs standard deduction?

4) Okay, good to know on the ITIN wait time. It sounds like we'll likely go for the Married, filing separately route for a few years at least, so for now my partner can avoid the ITIN and IRS entirely.

Thank you again for your response, and keen to hear if any others have experience with points 1) and 2).


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## MyExpatTaxes

parti_sapphire said:


> I'm an American living in France for a few years, recently married to a European with no connection or legal status in the US. I have a few questions related to choosing how to file with my new partner, and how to set up some financial accounts.
> 
> I understand our/my US filing options are 1) Non-resident alien (Married Filing Separately, so I only get standard deduction, but partner doesn't need to to file anything with the US = nice); 2) Resident Alien (Married Filing Jointly, so we get double the standard deduction, but partner has to file her income, FBAR, etc).
> 
> Additional background: My partner won't earn much money for the forseeable future, and we'll both be living off of my US investments/savings for a few years.
> 
> We are considering opening an _assurance vie _under her name, funded by my employment income. We'll only keep the _assurance vie _open for a few years, before selling with some minimal c.1% p.a. risk-free gains (_fonds euros_).
> 
> A few questions that arise from this:
> 1) Can I just transfer (ie give) my spouse money to fund her _assurance vie_, with no tax obligations on the transfer? Assume I earned 100% of this money while we were married.2) If the _assurance vie _were under my name, it would qualify as PFIC, and I'll have to pay the really high tax rate on such instruments, plus file a Form 8621. If, however, it's under her name exclusively, can we avoid the US taxation? Is there any caveat because the initial funding source of the _assurance vie_ is my employment (and I'm an American)?3) Does standard deduction, or Married standard deduction, apply to the US investment gains that we'll be living off of for the next few years?4) Is there anything preventing us from starting with one status - Married Filing Separately - and then changing that to Married Filing Jointly in one or two years?Thank you so much to everyone on this forum. You've already helped me so much with the questions that led up to the above. And best of luck to all the American expats trying to navigate all these rules!!- Parti Sapphire


1) Yes, as long as you are under the Gift Threshold for NRA Spouses:
Instructions for Form 709 (2021) | Internal Revenue Service
2) If it is under their name and you file as MFS, then there is no PFIC issue for you.
3) Yes, of course.
4) No, but once you make the election, you should keep it, as it is a once-in-a-lifetime election
Nonresident Spouse | Internal Revenue Service

Thank you so much to everyone on this forum. You've already helped me so much with the questions that led up to the above. And best of luck to all the American expats trying to navigate all these rules!!

--- Of course, check us out for more support. We offer both DIY tax software and professional support if needed. You got this!
Instructions for Form 709 (2021) | Internal Revenue Service


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## Bevdeforges

Um, on #4, let me just point out this part of the IRS page you cited:


> You must file a joint income tax return for the year you make the choice (*but you and your spouse can file joint or separate returns in later years*).


From this I don't believe it is a "lifetime election."


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## Bevdeforges

parti_sapphire said:


> Previously I was above the $108,700 FEIE exclusion limit, but going forward I we won't be - gains on investment sales will be less than that, probably in the $40-50K p.a. in gains. So I think we'll go for FEIE.


You can't use the FEIE on "unearned" income. Basically, the FEIE is only an option for salary and wage income (or, if you are "self-employed" on the amount you make from your business. It cannot be used to offset investment income. However, if you have both salary income and investment income, there is no problem using the FEIE for the salary income and then using the Foreign Tax Credit to offset tax on the investment income. Basically, you get a tax credit for the income tax paid to France for the investment income. (Of course the exact calculation of the credit isn't quite as simple as it sounds, but that's the general idea.)


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## parti_sapphire

Any view on how much risk one would be taking if they went over that gift threshold without reporting? Is it something that's easy for the IRS to check? Seems unfair to me to have different rules for US spouses vs non-US spouses, love is love!


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## 255

@parti_sapphire -- As @Bevdeforges said -- very little risk -- zero risk, if you report it. Even so, I'd just suggest splitting the gift over a couple of years. The exclusion amount is per year.

Just an aside, the normal gift tax exclusion (for non-spouses) is around $15,000.00 (it's occasionally adjusted for inflation.) So if I want to "get around" that limit in gifting to my child -- I can gift $15K directly, gift $15K to their spouse and my wife can do the same, so 4 X $15K, annually = $60K. Throw, a couple of minor children in the mix and it can be more. Do this at Christmas time and split the gift over the new year and the gift is essentially doubled. I'd suggest writing separate checks or do separate electronic transfers, to keep it clean.

Your question: "Is it something that's easy for the IRS to check?" Yes, it is easy, but what would motivate this short staffed organization to investigate? Maybe unfair, but life isn't fair! The limits are fairly generous and there certainly are "other" ways to maximize your true intent. I'm financially conservative through, so I'd just gift the max, each year and pretty soon, she'll have "real money." I don't know what your ultimate goals are, but you might want to do some estate planning.

If you do decide to gift more than the exclusion amount, so what? All it triggers is a requirement, on your part, to file a "gift tax" return, for that year. The amount of the "overage," above the exclusion, would reduce your life-time estate tax exclusion (currently at $22 million.) As @MyExpatTaxes said, utilize https://www.irs.gov/pub/irs-pdf/f709.pdf if you decide to gift more than the exemption, in any one calendar year. Cheers, 255


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## Bevdeforges

Simple answer is that there is really not all that much reason to declare the gift - as long as you have no plans to return to the US for residence and your spouse remains an NRA not subject to tax reporting in the US. Depending on your ages, that may or may not be something you can know "for sure" at this stage in your lives. But as 255 says, you're dealing here with the "gift tax" - which doesn't really get settled until after you have died and if and when your heirs or survivors need to file estate tax. Who knows what the laws will be at that point?


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## parti_sapphire

Super helpful, both @255 and @Bevdeforges. I appreciate it.


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