- Do you live in the U.S. on a nonresident visa (e.g., G-4, A, or J visa)?
- Do you live outside the U.S. but own U.S. real estate or investments?
- Did you give up your green card or U.S. citizenship but maintain property or accounts in the U.S.?
If you answered yes to any of these questions, you may know the rules that apply to you for U.S. income tax, but what about U.S. gift and estate taxes?
This article is meant to help you avoid an expensive lesson by covering some basic information about the U.S. gift and estate taxes for nonresidents.
What Most Nonresidents Don’t Know
There are three main points that every nonresident should know about U.S. gift and estate taxes:
- The definition of “resident” is different for U.S. gift and estate tax purposes (vs. income tax purposes). Rather than being based on visa type or days spent in the U.S., “residency” for gift and estate tax purposes is based on the taxpayer’s “domicile.” If you are domiciled in the U.S., then you are subject to U.S. gift and estate taxes on a worldwide basis (more on this later).
- If you are a nonresident who is domiciled outside the U.S., and you own U.S. real estate or other U.S. assets (e.g., personal property, investment accounts, bank accounts), then you may be subject to U.S. gift tax on gifts of your U.S. assets > $15,000 and U.S. estate tax on your U.S. assets > $60,000. This is true even if you have previously given up your U.S. citizenship or green card.
- Certain U.S. states have their own estate and gift taxes.
The Gray Area That Is “Domicile”
A key concept in determining whether you are subject to U.S. gift and estate taxes (and to what extent) is “domicile.”
For income taxes, tax residency is usually very clearly defined. It can be determined based on clear-cut criteria and bright-line tests.
For estate and gift taxes, the concept of “domicile” is not so clear cut.
While the relevant rules are varied and complex, the two essential elements are physical presence and intent. Individuals are considered U.S.-domiciled if they are living in the U.S. for even a brief period (the physical presence element), with no definite, present intention of later relocating to live in a specific other location (the intent element).
In practice, the determination of domicile involves considering a variety of factors that may be evidence of intent—location of primary residence, family ties, social interests, personal belongings, and so forth.
This means that individuals may be considered nonresident for income tax purposes but U.S.- domiciled for estate and gift tax purposes, or vice versa.
For example, individuals present in the U.S. on nonresident visas (such as G-4 visas) may be considered U.S.-domiciled for estate and gift tax purposes if they want to permanently remain in the U.S., even though their current visas do not allow permanent residence and even though they are considered nonresident aliens for U.S. income tax purposes.
Whether or not you are domiciled in the U.S., you may owe U.S. gift and estate taxes.
Your domicile is important because it determines the rules and thresholds that apply to you.
Because “domicile” is a nuanced concept, your personal assessment of where you are domiciled may not align with the U.S. Internal Revenue Service’s assessment.
If your situation is not clear cut (and perhaps even if it is), you may wish to engage an attorney or tax specialist to help confirm your position.
It is important that you get this assessment right because it determines the quantity and types of your assets that will be subject to tax and the relief measures available to you. It also has a major impact on your tax planning—measures you can take during your lifetime to transfer gifts and relocate assets (should you choose to do so), to minimize the tax hit.
The following sections outline the rules that apply based on your domicile.
Estate Tax Treatment for Individuals Who Are NOT Domiciled in the U.S.
If you are a nonresident who is NOT domiciled in the U.S., then the U.S. estate tax (at rates of 18% to 40%) would be levied on any “U.S. situs” assets you own in excess of $60,000 at the time of your death. U.S. situs assets generally include real and tangible personal property located in the U.S., business assets located in the U.S., and stock of U.S. corporations.
The most common U.S. situs assets reported on a U.S. nonresident estate tax return include U.S. real estate and U.S. stocks. Many individuals decide not to sell their U.S. home when they move abroad, opting instead to either keep the house as a vacation home or as a rental property.
Because the estate tax exemption amount is so low for non-U.S. domiciliaries (only $60,000), owning a U.S. house will almost always result in a U.S. estate tax obligation. In addition, many individuals maintain a U.S. investment account after leaving the country, and this can also create an estate tax return filing obligation.
It is important to note that the U.S. estate tax is levied regardless of whether your heirs are U.S. or non-U.S. persons (although an exception is made for a U.S. citizen surviving spouse, as described below).
In some limited cases, your country of domicile may have an estate tax treaty with the U.S., which may be invoked to exempt more than $60,000 of U.S. situs assets from the U.S. estate tax.
Also, a “marital deduction” is available, so if your surviving spouse is a U.S. citizen, any bequest to your surviving spouse would not be subject to U.S. estate tax upon your death.
In general, however, effective tax planning involves (1) evaluating the pros and cons of keeping assets in the U.S. vs. moving them abroad and (2) taking action accordingly.
Gift Tax Treatment for Individuals Who Are NOT Domiciled in the U.S.
As with the U.S. estate tax, if you are a non-U.S. domiciliary, you may still owe U.S. gift taxes.
For non-U.S. domiciliaries, U.S. gift tax (at rates up to 40%) applies to gifts of tangible personal property and real property located in the U.S., regardless of whether the recipient of the gift is a U.S. person or a non-U.S. person. The most common examples are gifts of cash from U.S. accounts and gifts of U.S. real estate interests. Making these gifts may result in huge U.S. gift tax liability.
Although non-U.S. domiciliaries are not entitled to a lifetime exclusion for gifts, you may take advantage of the annual exclusion ($15,000 for 2018, but adjusted for inflation), gifting up to that amount each year to each recipient.
Also, a “marital deduction” is available for gifts to a U.S. citizen spouse. An unlimited amount can be gifted to a spouse who is a U.S. citizen without triggering any gift tax.
Estate Tax Treatment for Individuals Who ARE Domiciled in the U.S.
The previous sections addressed the tax implications for individuals who are domiciled outside the U.S. But what about individuals who are found (for gift and estate tax purposes) to be domiciled in the U.S.?
For estate purposes, if you are domiciled in the U.S. (regardless of your residency status for income tax purposes), then you would be subject to the U.S. estate tax on the value of your worldwide assets at death in the same manner as U.S. citizens.
Estate tax rates currently range from 18% to 40%, and the estate tax applies regardless of whether your heirs are U.S. or non-U.S. persons.
Fortunately, for U.S. citizens and U.S. domiciliaries, the newly passed Tax Cuts and Jobs Act of 2017 just doubled the gift and estate lifetime exemption (i.e., combined exemption for lifetime gifts and bequests) to just over $11 million, meaning that your estate would only be subject to estate taxes if your total lifetime gifts and bequests exceeded this amount (under current law, which applies through 2025, assuming no changes are made before then).
In addition, a “marital deduction” is available, so if your surviving spouse is a U.S. citizen, any bequest to your surviving spouse would not be subject to U.S. estate tax upon your death.
Gift Tax Treatment for Individuals Who ARE Domiciled in the U.S.
As with the estate tax, the gift tax is broader for individuals who are domiciled in the U.S.
If you are a nonresident who is domiciled in the U.S., then any gifts you make are subject to gift tax (although exclusions apply), regardless of where the property is located and whether the recipient is a U.S. or non-U.S. person.
As mentioned above, if you are a U.S. domiciliary, you are entitled to a lifetime exemption for gifts and bequests of just over $11 million (under current law). However, there are some stipulations:
- If you make annual gifts of > $15,000 (2018 limit, adjusted annually for inflation) to any one recipient (other than a spouse), then you must file a Form 709 gift tax return for that year, and the gift uses some of your lifetime exemption amount.
- If you make an annual gift of > $152,000 (2018 limit, adjusted annually for inflation) to a non-U.S. citizen spouse, then you must file a Form 709 gift tax return for that year, and the gift uses some of your lifetime exemption amount.
- You may make unlimited gifts to a U.S. citizen spouse.
Don’t Forget about States!
Just as states have their own income taxes (based on their own rates, rules, income thresholds, and residency criteria), certain states also have their own gift and estate taxes, potentially resulting in a double hit—federal and state. Some states also charge inheritance taxes.
To avoid being blindsided by a major tax assessment, confirm whether the states in which you live and own property have instituted gift and estate taxes and the rules for each. States may have their own criteria for evaluating domicile, as well as their own thresholds for estate taxes and gifts.
For example, we often see nonresident taxpayers who own homes or other real estate in Maryland. Maryland has an estate tax of 16% charged to estates greater than $4 million (for 2018; in 2019 and later years, the Maryland exemption will match the federal exemption). Should they die in 2018, nonresidents with substantial Maryland assets may owe Maryland estate tax even if they will not owe any federal estate tax.
If you answered “yes” to any of the questions at the beginning of this article, or have any significant ties to the U.S., it is important to be aware of your potential U.S. gift and estate tax requirements.
As explained above, even if you are a nonresident for income tax purposes, U.S. gift and estate taxes may apply to you. Depending on your individual circumstances, your estate may be taxed at up to 40% of any assets over $60,000. In addition, any gifts over $15,000 may also be taxed at up to 40%, resulting in huge potential liabilities.
Unknowingly incurring U.S. federal and state gift and estate taxes can significantly reduce the value of assets you are able to pass on to your surviving spouse or other heirs.
If you are thinking about making a large gift, you should confirm whether you may incur U.S. gift tax, and whether any potential planning opportunities are available to reduce your U.S. gift tax obligations, before making the gift.
It may be possible to structure or execute your gift to (legally) avoid or reduce your U.S. gift taxes. Proper estate tax planning can also avoid or reduce U.S. estate tax liabilities for certain taxpayers.
Furthermore, if U.S. gift and estate tax returns are not properly and timely filed, significant interest and penalties may be levied, and they will continue accruing until the proper returns are filed and taxes paid. If you have previously made a gift that may be taxable, you should review your U.S. gift tax return filing requirement and potential tax liability as soon as possible to minimize the interest and penalties due.
If you pass away with unresolved gift and estate tax issues, the filing responsibility and tax liability can be passed on to your heirs.