It is no secret that the U.S. tax code is complicated. For foreign persons, compliance with U.S. tax laws is particularly onerous, especially when considering that different rules apply for income and estate tax purposes, and neither depends on an individual’s immigration status.
For income tax purposes, the U.S. presumes foreign persons to be nonresident aliens (NRAs) who must pay taxes only on income they derive from U.S. sources. Once NRAs apply for green cards or spend a specific and substantial number of days in the U.S., they are considered resident aliens (RAs) who, like U.S. citizens, must pay U.S. income tax on their worldwide income.
In contrast, foreign persons’ exposure to U.S. gift and estate tax depends on their “domicile” at the time of death or the country they call home. Unlike the facts-based tests for determining income tax residency, U.S. domicile considers the more esoteric evidence of a person’s “intent” to remain in the country based on such factors as the location of a primary residence, business, or personal belongings. Nonresident domiciliaries are subject to U.S. gift and estate tax only on assets situated in the U.S. at the time of death. In contrast, U.S. resident domiciliaries must pay estate and transfer taxes on their worldwide assets.
U.S. domiciled residents who pass away are required to file U.S. estate tax returns only when the fair market value of their worldwide assets at the time of death exceeds the individual estate tax unified credit exemption, which is $12.92 million in 2023, up from $12.06 million in 2022. Married couples filing joint tax returns in 2023 can shield up to $25.84 million from federal estate taxes, up from $24.12 million in 2022. This generous estate tax exemption is scheduled to expire in 2026 and revert to its 2017 level of $5.49 million for individual taxpayers, making it critical to engage in estate planning. Moreover, these thresholds are also subject to change depending on Congressional action.
When a nonresident U.S. domiciliary passes away in 2023, his or her estate must file a U.S. estate tax return if the fair market value of the decedent’s U.S.-situated assets at death exceeds $60,000. Estate taxes are due on U.S. situated assets that include tangible personal property as well as interest in and holdings of U.S. real estate and securities of U.S. companies. Excluded from estate tax are investments that generate portfolio interest, bank accounts that are not connected with a U.S. trade or business, and insurance proceeds.
Foreign persons who have a physical presence in the U.S. or who hold interest in or title to assets situated in the country must work with experienced financial advisors and tax accountants before stepping foot on U.S. soil in order to mitigate unnecessary exposure to income and estate taxes both in their home country and the U.S.
About the Author: Melvin Perez, CFP®, is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with Raymond James Financial Services. He can be reached at the firm’s Miami office at (800) 737-8804 or at firstname.lastname@example.org.
Provenance Wealth Advisors (PWA), 200 S. Biscayne Blvd., Miami FL 33131 (800) 737-8804.
Melvin Perez, CFP® is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The information contained in this report has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
To learn more about Provenance Wealth Advisors financial planning services click here or contact us at email@example.com
Posted on January 3, 2023