Federal Estate and Gift Tax Facts for Non-Us Citizens

Federal Estate and Gift Tax facts for Non-US Citizens

Since 1916, congress has imposed taxes at an individual’s transfer of wealth: The Estate Tax. It is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. It is merely an excise tax on the transfer of the decedent’s net wealth that passes to his or her heirs at death. In 1924, congress enacted a gift tax which to prevent full scale avoidance of the estate tax because a taxpayer could easily avoid the state tax simply by giving away property before he or she died. The Federal estate and gift tax laws that apply to United States citizens are different from those for non-citizens. People who are not United States citizens, such as nonresident aliens and green card holders, face a challenging United States estate tax environment when they invest in United States assets.

Residency considerations

          Since 2013, U.S. citizens and U.S. residents have been subject to estate and gift taxation at a maximum tax rate of 40% with an exemption amount of $5 million, indexed for inflation. The indexed exemption amount for 2016 is $5,450,000. In contrast, non-US residents are subject to US estate and gift taxation with respect to certain types of US assets, also at a maximum tax rate of 40% but with an exemption of $60,000, which is only available for transfers at death. Determining residence for US estate and gift tax purposes is different than determining US income tax residence.

         For income tax purpose, the IRS defines substantial presence test and green card status test to consider people whether they are resident in United States. For estate and gift tax purpose, a person is considered to be residence in the US for estate and gift tax purposes if he or she lives in the US and has no present intention of leaving. To determine whether you are a US resident, the following factors are considered:

•Statement of intent

•Length of US residence

•Green card status

•Style of living in the US and abroad

•Ties to former country

•Country of citizenship

•Location of business interests

•Places where club and church affiliations, voting registration, and driver licenses are maintained

      Thus, for most of international students who work here you may be a resident for income tax purposes, but not U.S. resident for estate and gift tax purposes.

Estate tax facts

        Resident aliens (green card holders) are taxed on their world-wide assets for estate purposes, just like U.S. citizens.  Non-resident aliens are only taxed on their U.S. sitused assets.  For U.S. bank accounts, CDs, annuities, stocks in foreign corporations, artwork and municipal bonds are not considered U.S. sitused assets. This is currently $5,450,000 per person and $10,900,000 per married couple.  This is adjusted annually for inflation under the American Taxpayer Relief Act of 2012.   The estate tax rate on assets in excess of $5,450,000 is forty percent.  A credit is allowed for foreign taxes paid on foreign assets under IRC Section 2014.  Under the Technical and Miscellaneous Revenue Act of 1988, transfers from non-resident aliens to anyone have an exclusion of only $60,000 unless you are a domiciliary of an estate and gift tax treaty nation.  Estate and gift tax treaties are different from the income tax treaties that many people are familiar with.  If you are a domiciliary of an estate and gift tax treaty nation, then you may be entitled to an exclusion of an amount up to the current unified credit amount of $5,450,000.  The estate tax rate on assets in excess of the exemption amount, whether your exemption is $60,000 or $5,450,000, is forty percent.  If a non-resident alien is from a non-estate and gift tax treaty nation, they will most likely to pay the forty percent estate tax on all U.S. sitused assets.

        Under code §2056 provides an unlimited deduction for the value of property passing to a surviving spouse. If a married taxpayer, no matter how wealthy, is willing to leave all his or her property to the surviving spouse, no transfer tax will be imposed on the estate. If the surviving spouse is US resident or green card holder, the marital deduction is generally not allowed.  The tax-free amount that can be transferred is the applicable exclusion amount which is $5450000 in 2016. It is not unlimited.  It is the same rule to non-resident alien. However, from US resident or non-resident alien passing property to surviving spouse if they are US citizens, no transfer tax will be imposed on the estate and it is unlimited marital deduction. The property from non-resident alien to non-US citizens the applicable exclusion amount is $60000.  Jointly owned property If the surviving spouse is not a US citizen, in general, the portion of jointly owned property that is taxed in the estate of the first spouse to die is based upon who provided the “consideration” to purchase the property. If the surviving spouse is a US citizen, then in general one-half the value of the jointly owned property will be included in the estate of the first spouse to die.

Gift tax facts

        US citizens and residents are subject to gift tax on all lifetime gifts, regardless of where the property is located. Under IRC Section 2523(f), the life time gift tax exclusion is not available to non-resident aliens.  Non-resident alien are subject to US gift tax only on transfers of tangible personal property located in the US and real property located in the US. There is an annual exclusion from US gift tax. In 2016, the annual exclusion amount is $14,000 per donee per year. US citizens and residents can also gift split, allowing married donors to exclude up to $28,000 per donee per year. Gift splitting is not permitted if either spouse is a non-resident alien. An unlimited amount can be gifted to a spouse who is a US citizen, whereas gifts to a non-US citizen spouse are offset by an increased annual exclusion. This annual exclusion for gifts to non-US citizen spouses is $148,000 for 2016. However, non-resident aliens can gift and receive an unlimited amount of intangible personal property based on Treasury Regulation Sections 20.2104 and 20.2105. This means that a non-resident alien can inherit/receive and can then transfer any amount of almost every asset type with the exception of real estate, cash, artwork and jewelry.  There are no gift taxes and no estate taxes owed on transfers of securities, intellectual property and life insurance.  There is no estate tax on bank accounts, gift tax still applies.