What Expatriates Need to Know: How U..S Inheritance Tax Laws Might Impact Your Inheritance/Estate/Gift Tax

A Guide To US Gift and Estate Tax For U.S. Expatriates

Are you worried about paying inheritance/estate/gift tax in the United States and your country of residence? In this guide, we’ll discuss what the inheritance tax is when it’s taxable and what tax obligation you might have in relation to inheriting an estate.

Losing a loved one is often an emotionally charged and complicated process. Things can get even more complicated by different laws and regulations if you’re inheriting property from someone who lives overseas or you reside abroad. It’s important to understand how US inheritance tax laws might impact you.

What Is An Inheritance? What is the Estate Tax?
The term “inheritance” refers to the transfer of wealth from a deceased person to his or her heirs. This includes real estate, stocks, bonds, cash, bank accounts, retirement plans, life insurance policies, etc. The estate tax is a state tax that you pay when you receive money or property from the estate of a deceased person.

What Is an Estate?
In the United States, a deceased person’s estate is a legal entity created after his/her passing. It is usually responsible for collecting the deceased person’s worldwide assets, paying off any outstanding debts, and distributing the rest among the deceased person’s beneficiaries. The estate includes everything the deceased person owned, whether real or personal property, tangible or intangible, anywhere in the world. The Estate tax is a tax on the estate (the property, money, and possessions) of someone who’s died.

How Much Can a U.S. Citizen Inherit Tax-Free?

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IRS: Estate And Gift Tax FAQs

The FAQs on this page provide details on how tax reform affects  Estate and Gift Tax. Visit the Estate and Gift Taxes page for more comprehensive estate and gift tax information.

Making large gifts now won’t harm estates after 2025

On November 26, 2019, the IRS clarified that individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. The IRS formally made this clarification in final regulations released that day. The regulations implement changes made by the Tax Cuts and Jobs Act (TCJA), tax reform legislation enacted in December 2017. Here are some questions and answers on the new law and regulations.

Q. What are gift and estate taxes?

A. Gift and estate taxes apply to transfers of money, property and other assets. Simply put, these taxes only apply to large gifts made by a person while they are alive, or large amounts left for heirs when they die.

Q. How are gift and estate taxes figured?

A. In general, the Gift Tax and Estate Tax provisions apply a unified rate schedule to a person’s cumulative taxable gifts and taxable estate to arrive at a net tentative tax.  Any tax due is determined after applying a credit based on an applicable exclusion amount.  A key component of this exclusion is the basic exclusion amount (BEA).  The credit is first applied against the gift tax, as taxable gifts are made.  To the extent that any credit remains at death, it is applied against the estate tax.

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Charles Woodson - Gift And Estate Tax

The tax code places limits on the amounts that individuals can gift to others (as money or property) without paying taxes. This is meant to keep individuals from using gifts to avoid the estate tax that is imposed upon inherited assets. This can be a significant issue for family-operated businesses when the business owner dies; such businesses often have to be sold to pay the resulting inheritance (estate) taxes. This is, in large part, why high-net-worth individuals invest in estate planning.

Exemptions – Current tax law provides both an annual gift-tax exemption and a lifetime unified exemption for the gift and estate taxes. Because the lifetime exemption is unified, gifts that exceed the annual gift-tax exemption reduce the amount that the giver can later exclude for estate-tax purposes.

Annual Gift-Tax Exemption – This inflation-adjusted exemption is $15,000 for 2018 and 2019 (up from $14,000 for 2013–2017). Thus, an individual can give $15,000 each to an unlimited number of other individuals (not necessarily relatives) without any tax ramifications. When a gift exceeds the $15,000 limit, the individual must file a Form 709 Gift Tax Return. However, unlimited amounts may be transferred between spouses without the need to file such a return – unless the spouse is not a U.S. citizen. Gifts to noncitizen spouses are eligible for an annual gift-tax exclusion of up to $155,000 in 2019 (up from $152,000 in 2018).
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