Estate and Gift Taxes for Nonresident Aliens

Summary

This report explains the major provisions of the federal estate and gift transfer taxes as they apply to transfers by nonresident aliens in 2014. Estate and gift taxes are two federal transfer taxes imposed on the passing of property title from one person or entity to another. The federal estate tax is levied on the transfer of property at death, while the federal gift tax is levied on the transfer of property during life by one individual to another while receiving nothing or less than full value in return. The following discussion provides basic principles regarding the computation of these two transfer taxes for this particular group of taxpayers.

In determining estate and gift tax liability, the Internal Revenue Code (IRC) differentiates between the estates of citizens, resident aliens, and nonresident aliens. Under the estate tax regulations, a “resident” decedent is a decedent who, at the time of his death, had his domicile in the United States. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later leaving that place. The estates of resident aliens follow the same rules and regulations as do the estates of U.S. citizens to determine estate tax liability. However, the estates of nonresident aliens are taxed differently.

The federal estate tax is measured by the size of the decedent’s estate. The tax is computed through a series of adjustments and modifications of a tax base known as the “gross estate.” Unlike the estates of U.S. citizens, the gross estates of nonresident aliens include only property “situated” in the United States. Certain allowable deductions reduce the gross estate to the “taxable estate,” to which is then added the total of all lifetime taxable gifts made by the decedent. Estates of citizens, resident aliens, and nonresident aliens share many deductions, including estate administration expenses, certain debts and losses, charitable bequests, and the amount of qualified transfers to a surviving spouse, although estates of nonresident aliens calculate some deductions differently. The tax rates are applied and, after reduction for certain allowable credits, the amount of tax owed by the estate is reached.

The federal gift tax for nonresident aliens is a tax imposed on gratuitous transfers of U.S. real estate and tangible personal property situated in the United States during life. The tax seeks to account for transfers of property that would otherwise reduce the estate and accordingly estate tax liability at death. The donor’s tax liability of the gift depends upon the value of the “taxable gift.” The taxable gift is determined by reducing the gross value of the gift by the available deductions and exclusions. The major deductions and exclusions available for nonresident donors are the annual exclusion, the gift tax marital deduction, and the gift tax charitable deduction.