Estate Taxes for US Citizens Living Abroad: What You Need to Know

As an American citizen living abroad, there are various tax considerations to keep in mind, including estate taxes. Estate taxes are levied on the assets a deceased person leaves behind for their heirs. However, the rules around estate taxes for US citizens living abroad can be complex and confusing. In this blog post, we'll break down the key takeaways and provide answers to common questions about estate taxes for US citizens living abroad.

What Are Estate Taxes?

Estate taxes are taxes imposed on the transfer of property from a deceased person to their heirs. If, for example, a person leaves their house and investments to their child, these assets would be subject to estate taxes upon their death. The tax is applied to the deceased person's estate before it passes into the hands of the heirs.

Does the US Have an Estate Tax?

Yes, the US has a federal estate tax. This tax is calculated as a percentage of the fair market value of all the assets involved. The tax rate ranges from 18% to 40%, depending on the total value of the inheritance. The good news is that there is a generous exemption for the federal estate tax.

Do US Citizens Living Abroad Have to Pay Tax on Inheritance?

US expats are subject to the same inheritance taxes as Americans living in the US. However, the IRS only taxes inheritances that exceed the exemption threshold. This means that most expats will not end up owing any federal taxes on an inheritance. It's important to note that some states have their own inheritance taxes, so if you are considered a resident of those states, your inheritance may be taxed at the state level even if you are exempt from federal estate taxes.

Are Foreign Assets Subject to Estate Taxes?

Yes, any assets owned by a US citizen may be subject to US estate taxes, regardless of where they are located in the world. For example, if a US citizen owns property in another country, that property would be subject to US estate taxes upon their death.

Do I Have to Pay Estate Taxes on My Foreign Inheritance?

No, under US tax law, the recipient of an inheritance does not have to pay estate taxes on the inheritance. Generally, the estate of a foreign person will not be subject to US estate taxes. This means that an inheritance that passes from a foreign person to a US citizen would be free from taxation.

What If I Leave an Inheritance to a Foreign Person?

If you leave an inheritance to a foreign person, the US federal estate tax would apply, regardless of the nationality of the recipient. However, the likelihood of having to pay US estate taxes on an inheritance left to a foreign person is low, thanks to the high exemption threshold. If your estate is valued below certain thresholds, your estate will not be subject to estate taxes, whether your heirs are US citizens or foreign nationals.

Foreign Tax Credits for Estates

If a foreign government taxes your inheritance, you can claim that tax as a credit to offset any US estate taxes you may owe. This is known as the Foreign Death Tax Credit.

Estate Planning Ideas for Americans Abroad

If you're an American living abroad and have assets that exceed the estate tax exemption threshold, there are estate planning strategies you can consider to reduce your potential tax liability. Here are some ideas:

1. Get Married: Marrying the love of your life can be a simple estate tax strategy. The estate tax exemption limit doubles for married couples, meaning you and your spouse could leave up to $22 million to your heirs without owing estate taxes.
2. Create a Trust: Trusts are a common way to reduce estate tax liabilities. There are various types of trusts, each with its own advantages and disadvantages. Consulting with a qualified tax professional can help you determine the best trust option for your situation.
3. Give Generously: US citizens have the right to gift up to $15,000 per year without having to file a gift tax return or owe any taxes. By giving gifts each year, you can lower the value of your estate and reduce any taxes that may apply to an inheritance.
4. Spend Spend Spend: Another way to reduce the value of your estate is to spend your finances. However, this strategy requires careful planning and consideration of assets, as certain properties like real estate would still be included in the value of your estate.

Seeking Help and Resources

If you have questions or need assistance with estate taxes for US citizens living abroad, the Greenback Team is here to help. They have extensive experience in helping US expats navigate the complexities of US tax obligations. Contact them for expert advice tailored to your specific needs.

In conclusion, understanding estate taxes for US citizens living abroad is crucial for effective financial planning. While most expats will not owe any federal estate taxes, it's important to stay informed about the rules and regulations that apply to your situation. By exploring estate planning ideas and seeking professional help, you can minimize your tax liability and ensure a smooth transfer of assets to your heirs.