[Jeeves McGloin]

I am an American citizen working in Japan (since 2001). My wife is Japanese.
We have a couple-100K USD in CDs, money markets, mutual funds in the US, all of which are shared accounts.

We have been filing our tax returns jointly. I heard recently, though, that my non-US citizen wife would be tax-exempt on this money.

I have looked through previous questions on this site, but am still unsure on this issue.

(A) Is she tax-exempt?
(B) If so, must she assume sole-acount-holder status of any money by the end of the tax-year?
(C) Is there an annual limit on the amount of money she may receive?
(D) If we do transfer money solely to her to limit taxes, would there be any tax advantage between money markets or mutual funds?
(D) What are the applicable tax forms to report this?
(E) Must we change our tax-filing status to independent rather than joint?

Some potentially relevant points:
--My wife has a U.S. SSN
--My wife does not earn income currently in US or Japan

Apologies if a tired topic, but would greatly appreciate your advice.

[AtlantaTaxExpert]

Mr. McGloin:

A) No. By filing jointly on your U.S. tax return and by signing the tax return, your wife VOLUNTARILY CHOSE to be treated as a resident alien by virtue of marriage. The first time you filed jointly, she was supposed to submit a signed statement to that effect, but, failing that, the choice for resident alien treatment was implied when she signed the tax return.

B - E) She CAN revoke her resident alien status, in which case your U.S. tax return would go from Married Filing Jointly to Married Filing Separately, but, in doing so, you effectively CUT your personal exemptions and standard deduction in half. Off-hand, I doubt that you want to do this.

Now, I suppose you could avoid U.S. taxes by transferring the accounts solely to her, but, ONE, she would have to revoke her resident alien status, and, TWO, there ARE gift tax considerations when assets are transferred to a non-resident alien spouse, and, THREE, once she takes control of these assets, they likely become subject to Japanese income taxes. All of these issues must be considered.

For 2008. A married couple who file jointly has two personal exemptions worth $3,500 each and a double standard deduction of $10,900, for a total of $17,900.

If your assets produces interest and dividends that amount to $17,900 or less, you already pay NO U.S. taxes, so why change?

If there are other income sources, then maybe transferring asset makes sense, but not before you discuss it in detail in person with a tax consultant who is cognizant of U.S. and Japanese tax issues, plus gift tax concerns.