Tax Traps for Non-Citizens and Expatriates
June 2010
In the United States, non-citizens are taxed much
differently than citizens. When Congress passed the Heroes Earning Assistance
and Relief Tax Act of 2008 (HEART Act), it had a significant impact on estate
and gift taxes for non-citizens, non-resident aliens and former U.S. citizens.
Different Taxes for Different Statuses
A resident is someone living in a particular location,
for even a brief period of time, with no definite intention of leaving.
Residency comes into play not only with respect to the estate tax, but also the
federal gift tax.
Here's a quick rundown of how the estate and gift tax
rules apply to U.S. citizens, U.S. non-citizen residents, non-resident aliens,
former U.S. citizens, and former U.S. residents:
U.S. Citizen. For 2010 there is no federal estate
tax. It is set to automatically reappear in 2011 at an exemption rate of $1
million per person, unless Congress acts to renew it at a higher rate. (We are
monitoring this issue and will alert you as to any changes.) A citizen may take
an unlimited marital deduction for any assets in his estate, passing to a
citizen spouse. However, a citizen is not allowed to take a marital deduction
for any assets passing to a spouse who is not a citizen. With respect to the
gift tax, a U.S. citizen has a $1 million lifetime exemption for all property,
wherever situated in the world. Citizens receive a $13,000 annual gift tax
exclusion per transferee. Citizens are allowed unlimited gift tax exclusions for
any lifetime transfers to a spouse who is also a citizen.
U.S. Resident. Estate and gift tax laws are
almost identical for U.S. residents as for citizens.
Non-Resident Alien. A non-resident alien has a
$60,000 estate tax exemption amount and is subject to the gift tax for lifetime
transfers of real or tangible property situated in the U.S. An annual gift tax
exclusion of $13,000 per gift recipient per year applies for each transfer.
Expatriate. U.S. citizens and U.S. residents who
have left the country are informally referred to as "expatriates" for
transfer-tax purposes. Expatriates who severed ties with the United States
before June 17, 2008, are not subject to the new HEART legislation but are
instead subject to the "10-year rule" (for details,
visit the IRS website).
"Exit Tax" on Former U.S. Citizens
A common estate planning technique for wealthy U.S.
citizens was to renounce their citizenship. Congress closed this with an "exit
tax" in the HEART Act.
The IRS presumes expatriates subject to the 10-year rule
to be leaving the United States for tax avoidance reasons, if they:
-
had an average annual income of $145,000 for
the five years before expatriating from the U.S.;
-
had a net worth of $2 million or more; or
-
failed to comply with expatriation filing
requirements for the five years prior to leaving the United States.
Before the HEART Act, there was no trigger of any
federal tax upon a U.S. citizen or resident leaving the United States. However,
the HEART Act imposes significant exit taxes.
Adapted from the Daily Plan-It newsletter. Hoopes,
Adams & Alexander, PLC, is a Chandler, Arizona, law firm offering services to
Phoenix-area clients in the areas of estate planning, entity formation,
commercial and real estate transactions, and civil litigation. |
