June 2010 Tax Traps for Non-Citizens, ExpatriatesIn the United States, citizens and non-citizens are taxed much differently. 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. | 
