4. Taxation
a. Tax system
Federal tax liability is imposed on US citizens and US residents
on a worldwide basis, while non-US citizens not resident in the US
are generally subject to federal taxes only on certain assets
located within the US and sources of income within the US. It is
possible for non-US citizens to acquire income tax residency
without being resident for federal estate and gift tax purposes.
States that have an income tax similarly impose a tax on the entire
income of their residents but only income from within the state for
non-residents.
i. General residence concepts
1) For income tax purposes, two tests determine residence:
- the green card test, or
- the substantial presence test.
Under the green card test, a lawful permanent resident of the US
for immigration purposes, a green card holder, is conclusively
resident for income tax purposes once the green card holder enters
the US on the green card.
Under the substantial presence test, an individual who regularly
conducts business or otherwise maintains a physical presence in the
US, even if that person’s permanent home is outside the US, will
acquire income tax residency. The substantial presence test
consists of two separate and alternative tests: the 183-day test
and the three-year formula test.
The 183-day test provides that a person who is physically
present in the US for at least 183 days in a given calendar year,
and who does not qualify for student, teacher, diplomat or other
exempt status, will be resident for income tax purposes, unless a
treaty tie-breaker provision applies.
Under the three-year formula test, a person is US resident if
physically present in the US for at least 31 days in the current
year and 183 days over a three-year period, taking into account
each day of physical presence in the current year, one-third of
each day of physical presence in the first preceding year, and
one-sixth of each day of physical presence in the second preceding
year. If an individual is resident in the US under the three-year
test, income tax residency can be avoided only if the individual
qualifies for a treaty tie-breaker or for the closer connection/tax
home exception, which applies if the individual spent no more than
183 days in the US during the calendar year, maintained closer ties
to another country for the year in question, and filed the required
statement substantiating that claim.
There are few exceptions to the test for determining physical
presence. Days of travel into and out of the US are not excepted
unless the travel is solely to pass through the US and no business
is conducted during such travels. An individual will not be present
in the US for any day on which the individual was prevented from
leaving the US by a medical condition that arose while in the
US.
To prevent US residents from avoiding tax on non-recurring US
source capital gains by temporarily abandoning resident status, a
special anti-avoidance rule applies to certain non-citizens who
temporarily abandon their status as an income tax resident. This
provision applies to any non-citizen who (i) is resident in the US
for a period of at least three consecutive calendar years, and (ii)
thereafter ceases to be resident, but subsequently becomes a
resident again before the close of the third calendar year after
the close of the initial residency period.
2) For gift and estate tax purposes, ‘resident’ means
‘domicile’. An individual acquires domicile in the US when
physically present with the intention to reside there permanently.
Domicile, unlike income tax residency, is based on facts and
circumstances in all cases. Domicile is presumed to continue in the
foreign jurisdiction until it is established in the US. A treaty
may provide relief from the application of the US transfer tax
regime.
ii. Rates
Official IRS federal tax brackets and rates that track changes
in inflation and other economic data are not usually released for
the following tax year until late fall. There will likely be
substantive changes in tax rates and rules beginning in 2011.
1) Income tax
For tax year 2009, the highest federal tax rate on an
individual’s ordinary income is 35 per cent. The tax rate on most
long-term capital gains, applicable to the sale or disposition of a
capital asset held for more than one year, is 15 per cent for tax
year 2009. This capital gains tax rate also applies to qualified
dividend income, subject to certain holding requirements. Qualified
dividend income includes dividends from domestic corporations and
from foreign corporations incorporated in a US possession or
eligible for the benefits of a US income tax treaty with an
exchange of information provision. Dividends from foreign
corporations will also qualify for the reduced rate if the
corporation’s dividend-paying stock is readily tradable on an
established securities market. The reduced rate is not available
for dividends paid by a foreign investment company or passive
foreign investment company.
2) Withholding tax
The federal withholding tax rate on income paid to non-US
citizens who are not resident in the US and to foreign entities
including trusts and corporations is 30 per cent. The withholding
tax is generally collected on a gross basis, before deductions.
There is a separate withholding tax regime for dispositions of US
real property by foreign owners. Individuals who are able to claim
relief under a double tax treaty may be entitled to a lower
withholding tax rate.
3) Gift and estate tax
Gift and estate tax rates, credits, and deductions are discussed
below.
iii. Filing requirements
1) Gifts and bequests from non-US persons
US persons, both citizens and residents, must file Form 3520 to
report gifts and bequests from non-US persons that exceed
USD100,000 in any calendar year. The name of the non-US person is
not reported. Gifts from related non-US persons are aggregated. US
persons are not required to report education or medical payments
paid directly by non-US persons. Gifts from foreign corporations or
partnerships exceeding USD14,139 in calendar year 2009 must be
reported by the US recipient.
2) Distributions from foreign trusts
US persons must file Form 3520 to report distributions of any
amount received, directly or indirectly, from a foreign trust. The
trustee may, but is not required to, provide the US beneficiary
with either a foreign grantor trust beneficiary statement or a
foreign non-grantor trust beneficiary statement, as appropriate.
The beneficiary may rely on the statement to determine the US
income tax consequences of the distribution to the beneficiary. If
the trustee does not provide such a statement, the distribution is
fully taxable to the US beneficiary, and the beneficiary’s US tax
on the distribution may also be subject to an interest charge.
Loans from foreign trusts to related US persons are generally
treated as distributions and subject to Form 3520 reporting.
Qualified obligations, which are respected as loans, are also
reported on Form 3520. Distinctions between grantor and non-grantor
trusts and the definition of a foreign trust are discussed
below.
3) Transfers to foreign trusts
US persons must report on Form 3520 both direct and indirect
transfers to foreign trusts, including transfers at death. A US
person treated as owner of a foreign trust for income tax purposes
must file Form 3520 annually, along with Form 3520-A, which is
prepared by the trustee and includes an income statement and
balance sheet. If the foreign trust has not appointed a US agent
who can supply the Internal Revenue Service with trust
documentation upon request, then the trust agreement and related
documents are to be filed with Form 3520-A. The US owner’s death
also triggers a Form 3520 filing.
4) US owners of foreign corporations
US persons owning, directly or through a trust, more than 10 per
cent of a foreign corporation, are required to file Form 5471. US
persons investing, directly or through a trust, in a passive
foreign investment company must file Form 8621.
5) Interest in or signature authority over foreign account
US persons with a financial interest in or signature authority
over a foreign bank or financial account must file Form TD F
90-22.1 annually, unless the aggregate value of such accounts does
not exceed USD10,000.
6) Penalties
Financial penalties for failure to file Forms 3520 and 3520-A
can amount to 35 per cent of the amount involved, even if no tax is
due. Penalties related to the other forms can be even higher.
Criminal penalties can also be imposed.
b. International
i. Citizens and residents with foreign
investments/transactions
US citizens and non-citizens resident in the US are subject to
federal income tax on worldwide income. In addition, anti-deferral
rules require that certain accrued income of controlled foreign
corporations and passive foreign investment companies be taxed to
their US shareholders, whether or not distributions have been made.
Stock ownership is determined through an application of attribution
rules applicable to family members and to intermediate entities
such as trusts. Stock owned by a trust is attributed
proportionately to the beneficiaries of the trust.
ii. Expatriates
1) Individuals expatriating before 17 June 2008
An alternate income, gift, and estate tax regime applies to
certain non-resident aliens (NRAs) who have relinquished long-term
permanent US residency status (i.e. given up a green card held for
at least eight of the 15 years prior to expatriation) or US
citizenship.
All former citizens and former long-term residents expatriating
after 3 June 2004 will be subject to the ten-year expatriate tax
regime unless the following can be established or certified:
- average annual net income tax for the five preceding years does
not exceed USD127,000 (2005 threshold, adjusted annually for
inflation)
- net worth does not exceed USD2million
- all federal tax obligations for the preceding five years have
been complied with, and
- proper notice of expatriation has been given.
As with other NRAs, gross income of an expatriate includes only
income from US sources or effectively connected with the conduct of
a US trade or business. During the ten-year period following
expatriation, however, an expatriate is also subject to the
following rules:
- the expatriate’s US source income is taxed at regular income
tax rates if that produces a higher tax than the withholding tax
imposed on US source income earned by NRAs,
- sourcing rules for determining whether income has a US source
(and is therefore taxable to the NRA) are expanded to include the
following:
Limited exclusions apply for dual citizens and minors if they
have never had substantial connections with the US, measured by
certain objective criteria, and are in compliance with any federal
tax obligations. The ten-year expatriate tax regime will also not
apply if the former citizen or former long-term resident is present
in the US for more than 30 days. Instead, such individual will be
subject to US income, estate and gift tax as a US citizen or
resident for that taxable year. An individual will be treated as
present in the US on any day they are physically present in the US
at any time during that day.
Expatriating individuals are required to file an annual return
for each year in which they are subject to the ten-year expatriate
tax regime, regardless of whether federal income tax is due.
Failure to file will be subject to a penalty of USD10,000, unless
the failure is due to reasonable cause and not to wilful
neglect.
An immigration law, sometimes known as the Reed
Amendment, applies a subjective motivation test whereby
individuals who are determined to have renounced US citizenship for
a tax avoidance motive may be denied entry to the US. To date, this
immigration law does not appear to have ever been enforced.
2) Individuals expatriating after 17 June 2008
The Heroes Earnings Assistance and Relief Tax Act 2008
(Heroes Act 2008) replaces the ten-year alternative tax regime with
a ‘mark-to-market’ deemed sale rule. Former citizens and former
long-term residents expatriating on or after 17 June 2008, who
would have continued to pay US tax under the ten-year alternative
tax rules, are instead subject to a mark-to-market income tax
imposed on the net unrealised gain in their worldwide property as
if sold for its fair market value on the day before the
expatriation or residency termination. Net gain on the deemed sale
is recognised to the extent it exceeds USD600,000 (as adjusted for
inflation for calendar years after 2008).
Where the expatriate is treated as the owner of a trust under
the grantor trust rules, the trust assets are subject to the
mark-to-market tax. Where the expatriate is a beneficiary of a
nongrantor trust, the mark-to-market tax does not apply. Instead,
upon any direct or indirect distribution from the nongrantor trust
to the expatriate beneficiary, the trustee must deduct and withhold
an amount equal to 30 per cent of the portion of the distribution
that would have been includible in the gross income of the
expatriate if they had continued to be subject to tax as a citizen
or resident. If the nongrantor trust distributes appreciated
property to the expatriate beneficiary, the trust must recognise
gain as if the property were sold to the expatriate at its fair
market value.
Deferred compensation items and specified tax deferred accounts
are excepted from the mark-to-market tax, but subject to a 30 per
cent withholding on distributions. Certain dual citizens from birth
and persons under age 18½ are not subject to the tax. An individual
may elect, on a property-by-property basis, to defer payment of the
tax until the return is due for the taxable year in which the
property is disposed, provided the individual furnishes a bond or
other security to the IRS and consents to the waiver of any treaty
rights that would preclude assessment or collection of the tax.
The Heroes Act 2008 also imposes a transfer tax upon the US
recipient of certain gifts or bequests of an expatriate. The tax is
calculated at the highest marginal estate or gift tax rate
(currently 45 per cent). The tax applies to a recipient only to the
extent the total value of gifts and bequests received during a
calendar year exceeds the amount of the gift tax annual exclusion
for that calendar year (USD13,000 for 2009). The tax is reduced by
gift or estate tax paid to a foreign country. Gifts reported on a
timely filed gift tax return and property included in the
expatriate’s US gross estate and reported on a timely filed estate
tax return will not be subject to the transfer tax, nor will gifts
for which a marital deduction or charitable deduction is
allowed.
A domestic trust receiving a gift or bequest from an expatriate
is required to pay the transfer tax. For a gift or bequest made to
a foreign trust, the tax applies when distributions attributable to
such gift or bequest are made to US beneficiaries. The recipient
can deduct the amount of the transfer tax with respect to the
portion of the distribution that is included in their gross income.
A foreign trust may elect to be treated as a domestic trust for
purposes of these rules.
iii. Non-citizens not resident in the US
NRAs are generally subject to federal income tax only on US
source income, which includes the categories of income listed
below.
- Fixed and determinable income of a periodic nature that is not
effectively connected with any US trade or business of the NRA,
such as most passive dividend and royalty income, is generally
subject to withholding tax on the gross amount of income paid.
- Interest income paid to NRAs by US borrowers is generally
subject to withholding tax, with certain important exceptions.
‘Portfolio interest’ paid on certain debt issued by US corporations
after 18 July 1984, and interest paid on deposits with US banks,
are generally exempt from withholding tax.
- Capital gains realised by NRAs from the sale or exchange of US
capital assets (e.g. shares of US corporations) are generally
exempt from federal income tax. An important exception to this rule
is that capital gains from the sale or exchange of interests in US
real property (or interests in US corporations that primarily own
US real estate) are subject to tax, regardless of the residency
status of the foreign owner. The tax is generally collected by the
purchaser, who is required to withhold 10 per cent of the amount
realised by the foreign owner on the disposition of the US real
property (generally the sales or contract price). Withholding tax
can be reduced or eliminated in certain circumstances. In addition,
NRAs are subject to tax on US source net capital gains, including
gains from the sale of US securities if the NRA is present in the
US for 183 days or more in the calendar year in which the sale
occurs.
- Income received by NRAs that is ‘effectively connected’ with
the conduct of a US trade or business is subject to federal income
tax in the same manner as if the income were received by a US
resident or citizen. Gross income subject to tax is reduced by
allowable deductions to arrive at taxable income.
iv. Tax treaties
Income tax treaties frequently reduce or eliminate withholding
tax on interest and royalties, and reduce the withholding tax rate
on dividends. Treaties also usually require foreign taxpayers to
have a ‘permanent establishment’ (i.e. a fixed office or other
place of business) in the US before the government will tax
business income attributable to that establishment.
c. Taxation of trusts, settlors and
beneficiaries
i. Types of trusts
1) Grantor and non-grantor trusts
Under federal income tax law, settlors are referred to as
grantors. Grantor trusts are trusts in which the settlor retains
certain rights, benefits or powers over the trust. US citizen or
resident settlors are taxed on income earned in a grantor trust
when they retain:
- any reversionary interest exceeding 5 per cent of trust
value
- the power to control beneficial enjoyment of trust
property
- the power to revoke the trust
- certain administrative powers, such as the power to borrow
trust funds and vote stock of closely held companies, or
- any interest in trust income.
Retained powers giving rise to grantor trust status may relate
to the whole or only a portion of the trust. Benefits and rights
granted to spouses are treated as held by the settlor. A settlor
who is a US citizen or resident will be treated as the owner of
trust property under the grantor trust rules with respect to any
property transferred to a foreign trust which has US beneficiaries,
regardless of any retained rights.
If the settlor is an NRA, the trust is considered a grantor
trust for purposes of federal income tax only if:
- a power to revest title to trust property absolutely in the
settlor is exercisable solely by the settlor without the consent of
any other person or with the consent of a related or subordinate
party subservient to the settlor, or
- the only amounts distributable (whether income or corpus)
during the lifetime of the settlor are distributable to the settlor
or the spouse of the settlor.
A trust that is not a grantor trust is a non-grantor trust.
Non-grantor trusts are separate taxable entities that can pass
items of income and deductions through to beneficiaries.
2) Foreign and domestic trusts
Under federal tax law, a trust that is not a domestic US trust
is a foreign (i.e. non-US) trust. A domestic US trust is any trust
that satisfies both parts of a two-part test: (i) a court within
the US is able to exercise primary supervision over the
administration of the trust (court test), and (ii) one or more US
persons have the authority to control all substantial decisions of
the trust (control test).
If both a US court and a foreign court are able to exercise
primary jurisdiction over the administration of a trust, that trust
will satisfy the court test.
US persons, for purposes of the control test, include US
citizens or residents, domestic partnerships or corporations, and
domestic estates or trusts. ‘Control’ means having the power, by
vote or otherwise, to make all the substantial decisions of the
trust, with no other person having the power to veto substantial
decisions.
A trust will automatically fail the court test if the trust
instrument provides that an attempt by a US court to assert
jurisdiction over the trust will cause the trust to migrate from
the US. A trust will also automatically fail the control test if an
attempt by any governmental agency or creditor to collect
information from or assert a claim against the trust would cause
one or more substantial decisions of the trust no longer to be
controlled by US persons.
ii. US and foreign grantor trusts
A US citizen or resident settlor of a trust classified as a
grantor trust, whether domestic or foreign, for federal tax
purposes, is subject to federal income tax on the trust’s worldwide
net annual income and capital gains. An NRA settlor of a grantor
trust is subject to federal income tax only on certain trust income
and gain from US sources, generally collected by means of the
withholding tax. A grantor trust, whether domestic or foreign,
itself is not subject to tax, although a domestic trust is
typically required to report all items of trust income, expenses,
dispositions, and other tax information to its settlor and may have
a tax withholding obligation.
For federal income tax purposes, a distribution from a grantor
trust to a beneficiary is treated as a tax-free gift to the
beneficiary by the settlor. If the distribution is made from a
foreign grantor trust, however, the beneficiary may claim this
treatment only if the trustee provides the beneficiary with a
foreign grantor trust beneficiary statement.
iii. US and foreign non-grantor trusts
A domestic non-grantor trust is a separate taxable entity
generally subject to federal income tax on worldwide income and
gains derived from all sources. The rates are the same as those for
an individual taxpayer, although the highest income tax rate
applies to a lower taxable income threshold than for individuals. A
domestic non-grantor trust is also ordinarily allowed the same
deductions as US citizens or residents, even if it has NRA
beneficiaries. Distributions to those NRA beneficiaries may,
however, be subject to the withholding tax.
A foreign non-grantor trust, on the other hand, is subject to
tax only on certain income and gains derived from US sources,
collected by means of withholding tax, or on income effectively
connected with a US trade or business. Foreign trusts are allowed
only those deductions available to NRA taxpayers.
Income earned by a US non-grantor trust is generally taxable to
the trust or to its beneficiaries, but not to both. A US trust,
like a US individual, is generally taxable on its capital gains and
on any ordinary income that the trust accumulates rather than
distributes. The trust beneficiaries are generally taxable only on
the amount of current ordinary income distributed to them. Capital
gains and accumulated ordinary income that are taxed to the trust
are thereafter treated for federal income tax purposes as additions
to trust corpus, and are not taxable to beneficiaries when
distributed to them in a subsequent year.
The trust is permitted to deduct the amount of the trust’s
current ordinary income distributed to its beneficiaries
(distribution deduction) from its taxable income. The
beneficiaries, in turn, are taxed in roughly the same manner as if
they had earned that distributed income directly.
The amount of a trust’s distribution deduction, and the amount
of distributed income taxable to the trust’s beneficiaries, is
limited to the trust’s distributable net income (DNI) for that
year. For most US trusts, DNI is equal to the trust’s taxable
income determined without the distribution deduction or the
personal exemption, less net capital gains, plus tax-exempt income
reduced by expenses (and any charitable deduction) allocated to
such income. Since DNI for a US trust does not include net capital
gains, such gains are generally taxable to the trust and not to the
beneficiaries.
In the case of a foreign non-grantor trust, DNI does include net
capital gains, foreign source income, or income otherwise exempt by
treaty. The calculation of DNI in a foreign non-grantor trust does
not affect the US taxation of the foreign trust, which is generally
taxed in the same manner as an NRA, but it does affect the taxation
of US beneficiaries who receive distributions from the trust. Since
DNI for a foreign trust includes net capital gains, such gains are
generally taxable to the US beneficiaries of the trust on
distribution to them.
DNI also helps determine the character of the distributed income
in the hands of the beneficiaries (such as tax-exempt income or
qualifying dividend income). The amount and character of the income
distributed cannot be designated by the trustee as coming out of
income or corpus.
US beneficiaries who receive a distribution from a foreign
non-grantor trust of income and gain accumulated by the trust from
a prior year are subject to a special tax regime, commonly known as
the throwback tax rules. The throwback tax rules generally attempt
to tax the beneficiary as if the beneficiary had been taxed on the
accumulation distribution in the same year or years in which the
accumulated income was earned by the trust. The beneficiary’s tax
rate, amount of the accumulation distribution, and tax years of the
beneficiary to which the tax is applied are all determined by a
formula set out in the US Internal Revenue Code.
For federal income tax purposes, a distribution from a foreign
non-grantor trust is treated first as a distribution of current
income, to the extent of such current income, then as a
distribution of income accumulated by the trust in prior years, to
the extent of such accumulated income, and then as a tax-free
distribution of trust corpus. In the case of a foreign non-grantor
trust, current and accumulated income includes capital gains, in
addition to ordinary income.
While distributions of current income retain their tax character
as dividends, interest, capital gain, and so on in the hands of the
beneficiary, distributions by a foreign non-grantor trust of income
accumulated from a prior year do not. Thus, a US beneficiary will
lose the preferential 15 per cent tax rate on distributions of
accumulated qualified dividends and long-term capital gains.
In addition to paying federal income tax on an accumulation
distribution from a foreign trust, the US beneficiary is also
subject to a non-deductible interest charge on the amount by which
the throwback tax exceeds the beneficiary’s regular income tax. The
interest rate is generally equal to the interest rate applicable to
underpayments of federal income tax.
The throwback tax rules do not apply to distributions from most
US trusts.
iv. Transfers to a trust
1) Income tax
A US citizen or resident settlor who transfers appreciated
assets to a foreign non-grantor trust is subject to federal income
tax as if the settlor had sold the assets for fair market value.
Transfers to and distributions from foreign trusts are subject to
reporting even if no tax is due.
2) Gift tax
A settlor may be subject to federal gift tax upon creation of a
trust, subsequent transfer of property to the trust, or
relinquishment of a retained power over the trust. A beneficiary
who holds a vested interest in trust may be subject to federal gift
tax on the transfer of that interest. Such a transfer may occur by
lapse of exercise of a power of appointment, disclaimer, or
assignment of the beneficiary’s interest.
d. Estate and gift taxes
Federal estate and gift taxes are levied at unified graduated
rates up to 45 per cent for tax year 2009. Most states also have
some form of gift and estate tax.
The federal estate tax, which is scheduled for repeal in 2010,
will likely continue with a top rate of 45 per cent and a unified
credit sheltering USD3.5 million from estate tax.
i. Estate tax
1) US citizens and US domiciliaries
The worldwide estate of a US citizen or US domiciliary is
subject to federal estate tax. An estate tax credit exempts a total
of USD3.5 million from estate tax for tax year 2009. A charitable
deduction is available for bequests to qualifying domestic or
foreign charities. A marital deduction is available for bequests to
a US citizen spouse. If the surviving spouse is not a US citizen,
property must pass to a qualified domestic trust (QDOT) in order to
qualify for the marital deduction, even if the spouse is resident
in the US. A QDOT, in effect, defers the estate tax until the
surviving spouse’s death.
2) Non-citizens not domiciled in the US
For non-citizens who are not domiciled in the US at death, US
situs property such as US real estate, tangible property
physically located in the US, and certain securities or obligations
issued by US persons or entities, are subject to federal estate
tax. US situs property also includes stock in a US
company. In addition, certain transfers of US situs
property, by trust or otherwise, will be included in the decedent’s
taxable estate if such property is situated in the US either at the
time of the transfer or the time of death. Among other assets, US
bank accounts and debt securities issued by US persons are
generally not subject to federal estate tax.
Federal estate tax rates are the same for non-citizens not
domiciled in the US as for estates of US citizens and residents,
but the estate tax credit for such persons exempts only USD60,000
from tax. Deductions available to the estate of a non-citizen
decedent not domiciled in the US are limited as follows:
- only a proportion of recourse debts and expenses are
deductible, based on the value of the US property and the value of
the decedent’s entire worldwide estate (to claim such a deduction,
the estate must disclose the decedent’s worldwide assets to the
IRS)
- charitable bequests deductible only to US corporate charities
and to foreign non-corporate charities if used exclusively within
the US, and
- if the surviving spouse is not a US citizen, property must pass
to a QDOT in order to qualify for the marital deduction, even if
the spouse is resident in the US.
An estate of a non-citizen not domiciled in the US who was
resident in a country with which the US has an estate tax treaty
may only be subject to federal estate tax on US real estate and
assets associated with a ‘permanent establishment’ located in the
US. Such estates may be exempt from federal estate tax on US
equities. They may also be entitled to a pro rata share of the
estate tax credit available to US citizens and domiciliaries, based
on the ratio of US property to all property of the decedent.
ii. Gift tax
The donor of the gift is liable for any federal gift tax. If the
donor fails to pay the gift tax, the tax becomes the donee’s
personal liability up to the value of the gift. In addition, the US
Treasury holds a lien on the transferred property that secures
payment of the tax.
1) US citizens and US domiciliaries
Transfers of property – whether real property, tangibles or
intangibles, and wherever located – by US citizens and US
domiciliaries are subject to federal gift tax. There is a small
annual exclusion for gifts valued at less than USD13,000 (for tax
year 2009) per donee. The US donor may double this annual exclusion
for gifts to third parties by filing a gift tax return and electing
to split the gift with the donor’s spouse. A gift tax credit
exempts a total of USD1million from gift tax. A charitable
deduction is available for gifts to qualifying domestic or foreign
charities (although an income tax deduction is available only for
gifts to domestic charities). A marital deduction is available for
gifts to a US citizen spouse. A donor can make lifetime tax-free
gifts to a non-citizen spouse of up to USD133,000 (for tax year
2009) per year.
2) Non-citizens not domiciled in the US
Transfers of intangibles by non-citizens who are not domiciled
in the US at the time of transfer (and are not subject to the US
expatriation tax rules) are not subject to federal gift tax, even
if the intangibles are US property (e.g. stock in a US company). As
a result, only real property and tangible personal property located
in the US are subject to federal gift tax (at the same rates as for
US citizens and domiciliaries) when transferred by a non-citizen
not domiciled in the US, with the following limitations on credits,
exclusions, and deductions:
- gift tax annual exclusion allows tax-free gifts of USD13,000
per year (for tax year 2009) per donee, but cannot be doubled using
the election to split gifts with the donor’s spouse, even with a US
citizen spouse
- there is no credit exempting gifts of US property in excess of
the annual exclusion amount from gift tax (unlike the estate tax,
where a credit exempts assets worth USD60,000)
- charitable gifts of US property deductible only to US corporate
charities and to foreign non-corporate charities if used
exclusively within the US
- gifts of US property to US citizen spouses qualify for the gift
tax marital deduction but gifts to non-citizen spouses are tax-free
only up to USD133,000 per year (for tax year 2009), and
- special rules apply to former US citizens and long-term
residents who are subject to the US expatriation tax rules.
e. Other taxes
The US government levies excise taxes and fees on certain
imports and exports. Currently, no value added, sales, stamp,
wealth, or property taxes are levied at the federal level.
Individual states may levy one or more such taxes.
f. Generation-skipping transfer tax
Federal generation-skipping transfer (GST) tax is imposed, in
addition to any gift or estate tax that may be due, on certain
transfers to a person two or more generations below that of the
transferor (a ‘skip person’), whether such transfer is made during
life or at death. The GST tax is a flat rate equal to the highest
estate tax rate (45 per cent for tax year 2009). A lifetime
exemption of USD3.5 million (for tax year 2009) is available to
shelter gifts or bequests from GST tax.