Gift Tax and Estate Planning for US Expats

Gift Tax and Estate Planning for US Expats

Gifting involves receiving something for nothing, but in certain situations the US government requires gift tax returns in order to assess whether there are any taxes owed.

When does the gift tax not apply?

  • Gifts between spouses when both of whom are US citizens.
  • Payments made on behalf of another person for medical and educational expenses are not taxed; however, payments have to be made directly by the gifting person. This is a great tax planning idea for grandparents.
  • A US person makes a gift to any individual up to $14K per year (as many individuals as one likes).

When a person makes a gift that is outside of the above exclusions, the gift tax rules and IRS tax filings apply. Let’s take a look at a couple of examples:

  • US citizen gifts to his/her non-US citizen spouse. A gift up to $147K (during one’s lifetime) is allowed without triggering the gift tax rules. If one exceeds the limit, then a gift tax return must be filed (doesn’t mean you will owe taxes).
  • A foreigner gifts a US citizen. Any gift above $100K from a foreign person (non-resident alien) triggers a filing requirement. Specifically, one must file Form 3520 with one’s tax return.

Estate taxes have to do with assets left behind upon one’s death. For 2015, US citizens that leave behind more than $5.43 million are potentially subject to tax. Therefore, most of us don’t need to worry about US estate taxes. However, some US expats are affected by exceptions to the general rules.

Similar to the gift tax, a US citizen can bequeath an unlimited amount to a US citizen spouse. However, the rule for a non-US spouse recipient (including permanent residents) is different.

  • US citizen bequeaths to his/her non-US spouse. An inheritance up to $147K is deductible; however, any amount above the limit is not deductible, and counts toward the $5.43 million. The $147K is an aggregate figure that includes amounts gifted during the lifetime of the deceased.
  • A non-US spouse is the beneficiary of a life insurance policy. The $147K limit includes any proceeds from a life insurance policy. Therefore, one course of action may be to put the policy under the name of the non-U.S. spouse, so that he/she is both the beneficiary and the policyholder (the U.S. spouse is the insured).

The subject of gift tax and estate planning is probably more complicated than it should be. While most people are not subject to taxation, there are some filing requirements, which we’ve touched upon in this article. For more general information on the subject (although slightly outdated), take a look at this article.