# US Taxes: using NRA for income above foreign income exemption



## jtt23

My wife is American, I'm European. We are moving to a 0% income tax jurisdiction. Her salary is going to be in excess of the $97,600 Foreign Earned Income Exclusion and I'm trying to figure out whether theoretically there is a way to optimize. While we were in Europe, she was paying so much local tax anyway that no additional US tax applied on her income above the threshold, but in the 0% tax jurisdiction this will not be possible and I understand she'll be paying the top tax marginal rate.

Her employer is willing to be very flexible. From a US tax perspective would it be possible to set up a trust or other entity in my name (non-resident alien) where any sums in excess of the $97k is paid into. No tax would accrue in the offshore jurisdiction (by definition), no tax would accrue in my home country (does not tax world-wide income) and no tax would accrue in the US (I'm not a resident). Does anyone have experience with such a solution? Do you see any issues?

Thanks in advance!


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## Bevdeforges

Technically speaking, no, what you're proposing won't work. (Or, at least, isn't legal under US tax laws.) But your wife should take a look at Publication 54 and check out the housing allowance. Depending on how far above the FEIE her salary is, that might give her some additional shelter.

Be very wary of setting up any sort of "trust" because those are viewed very skeptically by the IRS - anything resembling a "foreign trust" could subject you to the FATCA reporting nightmare.
Cheers,
Bev


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## BBCWatcher

And potentially PFIC complications to boot.

The Foreign Housing Exclusion is a good one. Here are some more:

1. This may seem counterintuitive, but if your income is limited then consider whether it makes sense for you to make what's called a Section 6013(g) election. That would mean you would file a joint U.S. tax return with your wife, and that would effectively increase the amount of income your wife can shield from U.S. taxation.

2. Earned income that your wife cannot shield via the U.S. Foreign Earned Income Exclusion and Foreign Housing Exclusion can be directed into a U.S. Roth Individual Retirement Account (IRA) which is highly tax advantaged. It may be necessary for your wife to make what's called a "backdoor Roth IRA contribution," but that's possible and common. (Use your favorite Internet search engine to look that one up.)

3. She should pay anything that's U.S. tax advantaged. For example, moving expenses are often tax deductible, so she should pay all such expenses that she can subtract from her U.S. reported earnings.

4. Your wife can give you up to $143,000 per year (tax year 2013) without paying U.S. gift taxes. Normal household expenses she pays to support you along with any of your medical and educational expenses do not generally count against that $143,000 per year limit. With that in mind, what she could do is make gifts to you and then you invest them in the highest earning types of savings vehicles, the ones that are likely to have the highest interest, dividends, and/or capital gains. She, in contrast, would make the more conservative (lower yielding) investments. In other words, within total household savings you would have the right investment mix, but the higher earning investments would be shielded from U.S. tax. This assumes that you do not file jointly, or that you cancel the Section 6013(g) election (which you can do once, never to return) before the savings in your name generate substantial income.

Note that if you predecease her she can generally inherit tax free (subject only to any foreign inheritance tax on your estate), but not the other way around. The value of her estate left to you in excess of $5.25 million (tax year 2013), less lifetime gifts to you, is taxable. Consequently, assuming you're going to stay together for life, it's generally a good idea for the U.S. citizen-spouse to transfer wealth to the non-U.S. citizen-spouse over his/her lifetime. This is a bit complicated, though, so you have to study it bit, but that's the general rule (and why the $143,000 limit exists, because non-U.S. citizen-spouses make excellent tax shelters).

5. She should maximize any/all tax-advantaged forms of compensation from her employer. As an example, her employer should provide the whole family with superb, "platinum"-level global health insurance (which is treated as nontaxable compensation). Employer-provided life insurance with a death benefit greater than $50,000 is U.S. taxable, however (for the premium value of the death benefit over $50,000 if that death benefit is not made payable to an IRS-recognized charity). I think the employer can provide reasonable per diems and periodic paid trips to visit the U.S. and those types of things are tax-advantaged, though please check that. The employer might be able to pay for her (and thus the family's) Internet service and/or her mobile phone if she's required to use those things as part of her job -- employer-provided "tools of the trade" are generally tax free. And so on.


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## BBCWatcher

6. If either one of you make charitable contributions, let her make all of them so long as she makes them to the U.S. IRS-recognized affiliate of the charity or cause you're interested in supporting. It can be particularly effective to donate certain types of assets. For example, let's suppose she purchased 10 shares of AT&T at $10 each for a total purchase price of $100. Let's suppose those shares are now worth $35 each ($350 total). Rather than paying a capital gains tax if she sells the shares, she can donate the shares to (for example) Doctors Without Borders (U.S.) and deduct the fair market value ($350) of that donation on her tax return.

7. (In my view) she should avoid investing in anything that runs afoul of the IRS's PFIC rules. A U.S. municipal bond fund purchased in the U.S. (such as those sold by Vanguard, e.g. VWLTX) may be an appropriate vehicle (as part of your total household savings and investment allocations) for her to shield her earnings from savings in her name. (Though she should not buy such funds within her Roth IRA.)

8. Speaking of which, I've known employers that get excellent foreign exchange rates and which leverage that strength for their employees. That is, the employer agrees to pay part of the local currency-denominated salary in the form of a foreign currency (i.e. U.S. dollar) payment to another country (i.e. the U.S.) at the employer's excellent exchange rate. If her employer is flexible, and if she plans to save anyway, this is an excellent way to do it. She'd ask her employer to make, say, regular fixed monthly deposits to her Vanguard account (for example, a U.S. tax-exempt municipal bond fund) as part of her compensation. She'd then get both the tax protection on her savings (the municipal bond fund in the U.S.) and an excellent foreign exchange rate that she herself may not be able to get. This works a bit better if your local country has a currency that's reasonably well correlated to the value of the U.S. dollar and/or if you don't mind having some U.S. dollar exposure within your total household investment portfolio.


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## jtt23

Bevdeforges and BBCWatcher,

Thank you so much for your thoughts! 

The simplest solution of joint filing is not going to help, as I will not be earning significantly less. I guess a combination of the different things you propose will work: housing exclusion is a useful tip and should be good for $13,314 I understand, and IRA/Roth IRA should be another $5,500.

The gift of up to $143k works well to protect against taxes on capital gains from her savings, but I guess before the gift is given, income tax still applies, right?


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## BBCWatcher

jtt23 said:


> The gift of up to $143k works well to protect against taxes on capital gains from her savings, but I guess before the gift is given, income tax still applies, right?


Income tax applies to income. Income can be spent or saved (i.e. form wealth). Gifts come out of wealth. Under U.S. tax laws the giver is responsible for paying the gift tax (if any). They're really separate issues.

Hypothetically she could have $10,000,000 in a bank account that pays zero interest. There's no U.S. tax on that wealth, because there's no income. It's possible to have enormous wealth and zero U.S. tax.

Now, if she gives you, say, $1,000,000 from that wealth, she would most likely be responsible for paying a gift tax. Then once the gift is made to the nonresident alien (you), any future income generated by that wealth is your income and consequently not U.S. taxable.

In other words, she can "use" you to shield the household's future unearned income -- interest, dividends, and capital gains -- from U.S. income tax. The accounts should be kept separate, though, and records should be kept on her side anyway. But because you (the NRA) don't pay U.S. tax, the U.S. limits the size of tax free gifts she can make to you.

She cannot use this method to shield any of her earned income (wages, salaries, tips, etc.) from U.S. income tax. This method is only useful for shielding future unearned income from any wealth accumulation from her income, subject to gift limits (to also avoid gift taxes).

Make sense?


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## jtt23

BBCWatcher said:


> In other words, she can "use" you to shield the household's future unearned income -- interest, dividends, and capital gains -- from U.S. income tax. The accounts should be kept separate, though, and records should be kept on her side anyway. But because you (the NRA) don't pay U.S. tax, the U.S. limits the size of tax free gifts she can make to you.
> 
> She cannot use this method to shield any of her earned income (wages, salaries, tips, etc.) from U.S. income tax. This method is only useful for shielding future unearned income from any wealth accumulation from her income, subject to gift limits (to also avoid gift taxes).
> 
> Make sense?


Yes, thank you very much - that makes a lot of sense. I guess the reason I was a bit uncertain was that when you give money to e.g. a charity out of your income, then obviously that donation is fully shielded from income tax. But gifts to spouses are clearly not in that category.


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## BBCWatcher

jtt23 said:


> I was a bit uncertain was that when you give money to e.g. a charity out of your income, then obviously that donation is fully shielded from income tax. But gifts to spouses are clearly not in that category.


Well, gifts to spouses are generally completely tax free in the U.S. tax code. The exception is gifts to nonresident alien spouses because those NRAs are so wonderfully useful for shielding future unearned household income from U.S. income taxes.

Non-spousal gifts are also taxable, but the way, if they exceed the IRS limit. I think the "ordinary" non-spousal IRS gift limit is about $14,000. Gifts to NRA spouses have a limit about 10 times that, and then gifts between U.S. citizen-spouses are unlimited.

Again, to reiterate, many things aren't considered gifts. For example, paying somebody else's medical bills is generally not considered a gift (in the IRS taxable sense).


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## BBCWatcher

I'm resurrecting this somewhat old thread to clarify a point about gifts. As long as you stay at or below the annual gift limit, your gifts do not count against your lifetime limit.

For example, if you're married to a nonresident alien spouse, you can give up to $143,000 (tax year 2013) per year to him/her without owing any gift tax plus pay for household expenses, educational expenses, and medical expenses -- and all that without reducing your $5.25 million (tax year 2013) lifetime exclusion.


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## FFMralph

The gift idea is good but, it only reduces the future passive income on the amount that was given as a gift and only if the account belongs to the NRA. 

The gift amount will still get taxed as general income unless it can be FEIE excluded or FTC credited. 

So in the Long run, you are not saving anything except future passive income. The best way is to avoid taxable income through deductions and the Foreign Housing Deduction. The Foreign Housing Deduction can only be used for costs above 15% of your earnings. If you earn alot, you are expected to pay alot for living costs.


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## BBCWatcher

Sometimes (often?) you cannot legally avoid taxes, and sometimes second best is the best you can do.

Many people consider U.S. Roth IRAs to be very good deals -- because they are. In effect an annual gift to a nonresident alien spouse is like a Roth IRA, except with a much higher annual limit and no restrictions on withdrawals. Yes, you pay for the gift from after-tax income. But then all gains on the gift are U.S. tax free and may also be foreign tax free if your nonresident alien spouse lives in a zero passive income tax jurisdiction.


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## jtt23

Thanks again BBCWatcher! Very useful indeed!


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## FFMralph

You lost me.
By deffinition, a gift is completely gratuitous, where the donor receives nothing of value in exchange for the given property. How can I receive gains from my gift?


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## BBCWatcher

You're married to the donee, that gift can accumulate capital gains, and the donee just might be willing to pay for your future nursing home, for example. 

Make sense now, or still confused?


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## Bevdeforges

In most places, a significant "gift" is actually treated as an early distribution of your estate. And if you check the rules, an NRA spouse has a much lower lifetime exemption from estate tax.
Cheers,
Bev


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## BBCWatcher

I can't find that, Bev. According to what I see in the tax code an NRA spouse is treated no worse than anybody who is not a spouse: the lifetime $5.25 million (indexed) estate exemption amount applies. Also, gifts below annual limits (including NRA spousal limits) do not count against that lifetime exemption, but gifts above the annual limits do.

If you see otherwise, let us know, but I'm reasonably sure I'm correct.

On edit: Just checked again, and I'm quite sure. To summarize, there's no U.S. income tax when you transfer annual gifts (currently up to $143,000, indexed) to a non-resident alien spouse (and/or to anybody else below their applicable limits), and there's no estate tax if your total estate is under $5.34 million (current limit, indexed) regardless of who inherits your estate. So you can give $143K each year to your NRA spouse (plus pay all household expenses, education, and medical), plus leave your entire estate to that NRA spouse up to $5.34 million total estate value, all with zero tax. Plus if your estate is worth more there's a way to defer estate taxes (QDTs) when leaving the estate to an NRA spouse, but that's getting a bit fancy.


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## BBCWatcher

To follow up, this is a bit off the track (estates), but it does reinforce the wisdom of the U.S. citizen spouse, particularly if wealthier, transferring wealth to his/her non-resident alien spouse. (Plus having the U.S. citizen spouse pay for all non-gift expenses: household, medical, and education notably.) These gifts to NRA spouses really are pseudo-Roth IRAs, plus there's the potential estate tax benefit if you think you'll be above the hefty exclusion limit when you die.

Your NRA spouse should not put these gift funds in a joint account, although a POD (payable on death) account back to you is OK. Ideally these funds should be invested in ways that are tax advantaged to your NRA spouse. If your NRA spouse lives in a zero gains tax jurisdiction -- Singapore would be one example -- that works.

Another way to think about this is that your NRA spouse can represent a legal tax free offshore account. And, when the time comes (e.g. retirement), your NRA spouse can pay for all your household, medical, and educational expenses without any tax consequences.

The default assumption here is you love (or at least tolerate) each other, remain married, and are willing to support each other. But even if that's not correct, in a divorce settlement the less well-to-do spouse is still likely to receive at least some marital assets. So you might as well transfer wealth in a tax efficient way now, with capital gains and such timed the way you want, not under court order.

Make sense now?


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