“Things as certain as death and taxes, can be more firmly believ’d.” - Daniel Defoe
Most U.S. nonresidents are aware these days that if you move to the United States or have U.S. investments, you may become subject to U.S. income tax laws. But what may not be as well known is that you may also be subject to U.S. estate tax, even if you don’t earn any income or file income tax returns.
The Internal Revenue Code is notoriously complex and this area is no exception. The Internal Revenue Code actually has two separate determinations for taxing a foreign person: residency for the income tax, and domicile for the estate tax. Even if you are not a resident for income tax, you can still be considered domiciled for the estate tax.
The IRS defines residency for income tax under a number of different tests, including whether the taxpayer holds a green card or if they’ve been in the country for a substantial portion of the year. You can also make the First-Year Election to declare your residency on the first U.S. income tax return you file.
When it comes to the estate tax, federal regulations determine a “domicile” as living somewhere for a period of time without any immediate plans of leaving. Domicile depends on both physical presence and intention to stay in the country. Simply put, if you intend to stay, you’re domiciled, but if you plan to leave, you need to actually leave.
If a person is deemed to be a U.S. resident for estate tax, their worldwide assets are subject to the estate tax. If someone is a nonresident, only assets with situs in the United States are subject to inclusion in his or her estate.
What Can You Do if You Are Subject to U.S. Estate Tax?
At this point, you may be thinking, “I have U.S. and foreign assets, so how can I reduce or avoid U.S. estate tax?”
The answer to that question largely depends on your current situation.
If you’re a nonresident alien who has a domicile in the United States, there’s a certain amount of preplanning you can do in anticipation of this tax, such as gifting intangible property before establishing a domicile in the U.S. There are other measures you can take, such as having U.S. real estate and equities owned by a foreign corporation, to make sure you are in the most advantageous position in the U.S. and the foreign country.
It’s also important to consider whether a nonresident’s country of citizenship has a tax treaty in force with the United States. The U.S. has active tax treaties with many countries, and depending on the country, a nonresident individual may be entitled to the full $5,495,000 estate exclusion or only a statutory $60,000 exclusion.
Expatriation might seem like a good way to avoid the U.S. estate tax—and this may be the case in certain situations—but Section 2107 of the Internal Revenue Code makes nonresident aliens subject to U.S. estate tax if they were domiciled in the United States for a period of five years or more. The window for being subject to this tax is ten years and you are taxed on any assets (tangible or intangible) that are situated in the United States.
If you are a foreign national living and owning property in the U.S. and have concerns that you may be subject to U.S. estate tax, we can help you sort out your options. We at Freed Maxick pride ourselves on our experience and expertise with these and other international tax matters. Please contact us if you have any questions.View full article
You may think you’re just friends with Uncle Sam, but he may have a deeper commitment in mind…
We spend a lot of our time talking with non-U.S. residents who spend significant amounts of their time in the United States. Far too often, we wind up talking with people who incurred some type of U.S. tax or filing obligation without knowing it. Those conversations frequently include statements like, “Well, it’s not like I obtained my citizenship, or pledged allegiance or anything. I just spent the winter in Florida!” In some cases, that can be enough.
Are You a U.S. Tax “Person”?
To figure out whether you are required to file a U.S. tax return, you first need to determine if you are a “person” for U.S. tax purposes. Federal law describes 3 categories of individuals that qualify as “persons” for U.S. taxes:
- U.S. Citizens—You would think that most people who incur a U.S. tax obligation because they are U.S. citizens would know that up front, and for the most part that’s true. However, every now and then, we do encounter people who may have been born in the U.S. and lived out of the country most of their lives, or someone with a parent who has U.S. citizenship. In some cases, these people may have an obligation without even realizing it.
- U.S. Green Card Holders—One of the most frequently asked questions from non-U.S. citizens who hold Green Cards is, “Do I have to file a U.S. tax return?” Basically, unless you relinquish the Green Card, you still need to file a Federal return even if you leave the U.S. You may not owe money, but the government will still be looking for a return from you as long as you hold the card.
- The Substantial Presence Test—Most non-U.S. citizens who unknowingly incur a tax obligation in the States qualify under this category. To meet the test, you must be physically present in the U.S. on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately prior.
The calculation of the 183 days is weighted toward the most recent days in the measurement period by counting:
- All the days you were present during the current year,
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
Even if you meet the substantial presence test, it is possible that you may still not qualify as a U.S. tax “person.” Depending on the purpose of your visit and your visa status, you may qualify as an “exempt individual” on some or all of the days you were physically present in the U.S. Also, under certain conditions, you may be eligible for treatment as a nonresident alien if you qualify for an exception given to individuals with a “closer connection to a foreign country” or by reason of a treaty.
If you spend significant time in the United States, or you’re planning to do so in the near future, you should consult a tax professional who is familiar with the filing obligations of non-residents before you go. If you have spent significant time in the U.S. previously and haven’t filed any income tax returns, you should consult a tax professional who is familiar with U.S. rules quickly. People who have a filing obligation in the States but do not file a return or other informational filings that may be required, such as FBARs, can be subject to penalties and interest that grow larger over time.
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