Most Americans don’t spend much time worrying about U.S. gift and estate taxes, because they don’t need to. For U.S. citizens and domiciliaries (don’t worry—I’ll come back to this term in a moment!), each tax offers generous exemptions.
For instance, the gift tax isn’t even a concern until an individual makes gifts totaling more than $14,000 to a single person in a single year, and that’s doubled for gifts by married couples. Even above that amount, the first $5,490,000 in total lifetime gifts (or in estate value) are excluded from the gift and estate taxes. Both taxes also allow a deduction for the full value of property transferred between spouses.
But what about people who aren’t U.S. citizens or domiciliaries, but own property in the United States—say, a Chinese investor or a Canadian looking for a vacation home? The gift and estate taxes both apply to that property, but the exemptions aren’t as generous. Because of this, foreigners who own U.S. property need to be even more mindful of U.S. gift and estate taxes when planning their estates.
Domicile and Transfer Taxes
U.S. transfer taxes like the gift tax and estate tax apply to the worldwide property of U.S. citizens and domiciliaries, but only to the U.S. property of non-citizen non-domiciliaries. In other words, for a non-citizen, what property is subject to these taxes depends on his or her domicile.
What’s that? The IRS defines domicile as the country where a person is present, even briefly, with no “definite present intention” of leaving. Unfortunately, that makes this concept a little hard to pin down in practice, and the IRS determines a person’s domicile by looking at all kinds of objective facts and circumstances.
Exemptions for Non-Domiciliaries
One part of the gift tax is identical for everyone, regardless of citizenship and domicile: the $14,000 annual per-donee exemption. But that’s where the similarities end. The annual exemption for gifts between spouses is only $149,000 (unless the receiving spouse is a U.S. citizen). Any gifts in excess of those amounts in a single year are taxable—there is no other lifetime exclusion amount to benefit from.
The estate tax is similar. Only the first $60,000 of estate value is excluded from the tax, including the portion of the estate that is left to a surviving spouse (again, other than a spouse who is a U.S. citizen). In other words, for non-citizen non-domiciliaries, the estate tax begins to take a bite out of their estate well before it would for a citizen.
On the other hand, the gift and estate taxes only apply to a non-domiciliary’s U.S. property. For citizens, the taxes apply to all their property anywhere in the world, so maybe that’s a fair trade-off.
In any event, the lower exemptions available for non-citizen non-domiciliaries with U.S. property means that they need careful estate planning at much lower levels of wealth than U.S. citizens do. Such individuals should contact a knowledgeable attorney in the United States to help with this aspect of their estate plan.