U.S. estate taxation of nonresident aliens.
The estate tax rules for nonresident non·res·i·dent
1. Not living in a particular place: nonresident students who commute to classes.
2. aliens are similar to those for resident aliens Resident Alien
A foreigner who is a permanent resident of the country he or she resides, but does not have citizenship.
Resident and non-resident aliens have different filing advantages and disadvantages. and U.S. citizens. There are, however, very important differences. Generally, a nonresident alien's estate is taxed only on property located in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . The estate tax rates are the same as those for citizens, but the unified credit unified credit
A credit used against federal taxes due on estates and large gifts. Under current law, the unified credit is sufficient to offset taxes on values of approximately $1 million in estates and large gifts. is smaller and there are significant restrictions on the use of the marital deduction marital deduction n. when one spouse dies, the survivor may take a tax deduction of half of the value of the estate of the dying spouse. Thus, the minimum value of the estate before there is a possible federal estate tax rises from $600,000 to $1,200,000 at the death .
Nonresident alien defined
A nonresident alien is a person who is neither a citizen nor a U.S. resident. The determination of resident or nonresident status is made at the time of death. "Residence" means domicile domicile (dŏm`əsīl'), one's legal residence. This may or may not be the place where one actually resides at any one time. The domicile is the permanent home to which one is presumed to have the intention of returning whenever the purpose for estate tax purposes; a nonresident is an individual whose domicile is outside the United States. Domicile is acquired by living in a place with the intent to remain and without the intent to leave.
A U.S. citizen who acquires citizenship solely by being born in a U.S. possession is treated as a nonresident alien for estate tax purposes, as is a person who acquires citizenship solely by being a resident of a U.S. possession. For example, a former French citizen who moved to the Virgin Islands and acquired U.S. citizenship through naturalization naturalization, official act by which a person is made a national of a country other than his or her native one. In some countries naturalized persons do not necessarily become citizens but may merely acquire a new nationality. proceedings in a Virgin Islands court is taxed as a nonresident alien.
Gross estate of nonresident alien
A nonresident alien's gross estate includes only real estate and other property located in the United States. If the property is subject to a mortgage for which the decedent's estate is not liable (e.g., a nonrecourse loan Nonrecourse loan
A loan for which no partner or related person bears the economic risk of loss. For example, if a partnership fails to repay a nonrecourse loan, the lender has no recourse against any partner except to foreclose of the assets used to secure the loan. ), only the equity value of the real estate is included. If the estate is liable for the mortgage, the full value of the property is included and a portion of the mortgage, equal to the ratio of U.S. situs [Latin, Situation; location.] The place where a particular event occurs.
For example, the situs of a crime is the place where it was committed; the situs of a trust is the location where the trustee performs his or her duties of managing the trust. property to worldwide assets, is taken as a deduction from the gross estate.
Tangible personal property located in the United States at the time of death is included in the estate. Exceptions to this rule include property held by a nonresident who dies while making a journey through the United States on his way to another country.
A nonresident's interest in community property is included in his gross estate to the extent of the interest he is deemed to own. If ownership is defined by foreign law, the portion of the property owned under the applicable foreign law is included in the gross estate. For example, the community property laws of Spain and France give each spouse a one-half interest in community property.
Selected intangible property intangible property n. items such as stock in a company which represent value but are not actual, tangible objects. located in the United States is included in a nonresident alien's gross estate. Bank deposits are not included, unless the interest earned on the deposit is connected to a trade or business in the United States. Corporate stock in a U.S. corporation is included in the gross estate; corporate stock in a foreign corporation is not. The corporation's location is determined by reference to the jurisdiction in which the corporation was organized. Bonds or other debt instruments of a U.S. person and of Federal or state governments are included in the gross estate. An interest in a partnership is included if it carries on its business in the United States. An interest in a trust is included to the extent the underlying assets are located in the United States. Life insurance is not included in the gross estate.
Computation of estate tax
Note: The following provisions apply only if not superseded by a treaty.
After the gross estate is determined, certain deductions are allowed. A nonresident alien's estate is allowed a deduction for the same kind of expenses, debts and losses that are deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). from a citizen's gross estate. The amount of the deduction is limited, based on the percentage of total assets of the estate subject to U.S. tax. For example, if 20% of the decedent's worldwide estate is located in the United States, he would be allowed to deduct 20% of his worldwide deductions to determine the taxable estate Taxable Estate
The total value of a deceased person's assets that are subject to taxation - minus liabilities and minus the prescribed tax-deductible portion of assets left behind by the deceased. .
The estate of a nonresident alien may claim a marital deduction for property located in the United States that is left to a surviving spouse who is a U.S. citizen. The estate of a citizen may claim a marital deduction for property left to an alien spouse (whether resident or nonresident) only if the property passes in a qualified domestic trust (QDT QDT Data (File Name Extension)
QDT Qualified Domestic Trust (estate planning)
QDT Quantum-Defect Theory
QDT Quicken Data
QDT Quark Dictionary
QDT Quicken Dictionary
QDT Quiet Drive Technology ). A QDT must have at least one U.S. trustee. Transfers of principal from the trust are subject to an immediate estate tax equal to the additional estate tax that would have been imposed had the distributed amount been included in the decedent's estate.
After the net taxable estate is computed, the estate tax liability of a nonresident alien is calculated the same way as for a U.S. citizen. However, the unified credit is $13,000; this shields $60,000 from tax.
If required by treaty, the unified credit may be equal to the amount that bears the same ratio to $192,800 as the property located in the United States bears to the entire gross estate.
Estate tax treaties
To avoid double taxation, the United States has estate tax treaties with many countries. The "situs-type" treaties allow the country in which the property is located to tax the estate. The "fiscal domicile-type" treaties allow the country in which the decedent An individual who has died. The term literally means "one who is dying," but it is commonly used in the law to denote one who has died, particularly someone who has recently passed away. lived to tax the property. Situs-type treaties: The primary authority to tax under a situs-type treaty is held by the country in which the property is located. if the decedent's resident country also taxes this same property, the resident country must give credit for the estate tax paid to the country where the property is located.
The treaty assigns a situs to different kinds of property. For example, real estate is situated where the land is located; corporate stock is situated where the corporation is organized; and patents and trademarks are located where they are registered.
The United States has situstype estate tax treaties with Australia, Finland, Greece, Ireland, Italy, Japan, Norway, South Africa South Africa, Afrikaans Suid-Afrika, officially Republic of South Africa, republic (2005 est. pop. 44,344,000), 471,442 sq mi (1,221,037 sq km), S Africa. and Switzerland.
Domicile-type treaties: The primary authority to tax an estate is granted to the decedent's fiscal domicile. There are some attributes that are shared by most treaties. If another country also taxes the same property, that country must give a credit for the taxes paid to the country of the fiscal domicile.
Domicile-type treaties have greater differences between them than situs-type treaties. The country in which the decedent had his fiscal domicile has the first priority to tax the estate. Fiscal domicile is defined by each treaty and may vary. Generally, it is the country in which the decedent has the greatest economic ties.
The United States has domicile-type treaties with Austria Denmark, France, Netherlands, Sweden and the United Kingdom.
Tax planning Tax planning
Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. opportunities
There are many tax planning opportunities available to nonresident aliens.
* Examine and take advantage of the factors that determine residency A duration of stay required by state and local laws that entitles a person to the legal protection and benefits provided by applicable statutes.
States have required state residency for a variety of rights, including the right to vote, the right to run for public office, the for estate tax purposes. A common problem for the nonresident alien is confusing the income tax definition of resident with the estate tax definition of resident. The estate tax definition depends on intent.
* Make lifetime transfers of intangible assets Intangible Asset
An asset that is not physical in nature.
Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. . Gifts of intangible assets, such as stock in a corporation, are not subject to gift tax.
* Convert property with a U.S. situs to property not situated in the United States by transferring it to (or taking it in the name of) a foreign corporation. Real estate held by a foreign corporation is not subject to estate tax.
* Make maximum use of the marital deduction provisions. If the surviving spouse is a nonresident alien, consider using a QDT.