Form 8854 Balance Sheet Math for Married Expatriates

I get a lot of questions. (Please keep them coming!)  Some of them I answer in my weekly Expatriation Only email, but this one seemed to be ripe for a quick blog post.

Question

Hi Phil, I have a question about the filing out the 8854. In the balance sheet section, since all my assets are joint assets with my wife, does that mean I input half of the value of the assets I have? Basically I have cash and stocks. So can I just put in half the amount? For example I have 500k usd in cash. Then I would put 250k in the balance sheet section.

Answer

The quick answer is “it depends”. 🙂 What does local law say? Are you and your wife treated as equal owners of the assets? This would be something like community property law, for instance. What is the reality between you and your wife? Is the reality that you and she both contributed equally to the purchase of the assets? But the reality is that almost all married couples treat their assets as equally owned by the two spouses. And in that case, you would simply report half of the value of the assets on your balance sheet on Form 8854. If your wife is also expatriating, she would report the value of the other half on her balance sheet.

Risk: Gift Tax

The risks (if there is an IRS audit) lie mostly in the situation where the expatriating spouse is married to a nonresident alien. If so, then you would be concerned about transfers to that spouse being treated as taxable gifts or taxable sales. Here is how it would work. You are married to a nonresident/noncitizen of the United States. As a matter of local law, that $500,000 of cash is all yours. But for expatriation purposes you report that you only had $250,000 of cash — half of the account balance. The worst case risk is that the IRS says you made a pre-expatriation gift of $250,000 to your spouse. For gifts to a nonresident/noncitizen spouse in 2015, the first $147,000 of gifts are exempt from tax [see Rev. Proc. 2014-61, 2014-47 I.R.B. 860, §3.35(2)], but everything above that is taxable. You made a taxable gift of $103,000. Result? You should have filed a gift tax return (and you didn’t). You should have paid gift tax (and you didn’t). You are not in full compliance with your tax obligations, so you are a covered expatriate. And you owe gift tax, too.

Risk: Capital Gains Tax

Here is another example of a tax risk. You are married to a nonresident/noncitizen of the United States. You and your wife live in a community property country (like Spain, for instance). You and your wife have a $500,000 piece of real estate and $500,000 cash in the bank. By agreement with your spouse, you get all of the cash, and she gets the real estate. Economically you are in exactly the same position. But this could be treated as a sale. You have transferred your half of the real estate to your wife, and she has transferred her half of the cash to you. The magic of Internal Revenue Code Section 1041(d) says that this interspousal transfer is not exempt from capital gains tax.

Reality

The reality is far simpler. Expatriating spouses usually just divide by two and create their balance sheets accordingly. It just works. Just know that behind the “it just works” saying, though, hides a tiny iceberg of risk.