Am I a US Income Tax Resident but Not for Estate or Gift Tax?

Am I a US Income Tax Resident but Not for Estate or Gift Tax?

Resident for US Tax Purposes but No Estate/Gift Tax?

When it comes to US taxation for income tax purposes, there are three main categories of individuals who are considered US persons: US Citizens, Lawful Permanent Residents, and Foreign Nationals to meet the Substantial Presence Test.  If a taxpayer falls into one of these categories, they are typically considered to be a US person for tax purposes. This means that they are subject to US tax on their worldwide income as well as subject to global reporting of international assets, accounts, and investments. Even if a person is considered a US person for tax purposes, they may be able to avoid worldwide income if they make a treaty election or qualify for the closer connection exception or other exclusion. Conversely, the rules for estate tax are different and are instead based on domicile. Technically, a person could be considered a US person for income tax purposes but not for state tax purposes. Let’s take a look at domicile and transfer tax.

What is Domicile?

Unlike residence — which just means that a person resides in a certain place — domicile is a much more detailed test. Domicile is the concept of living somewhere with the intent of remaining in that location.

As provided by the IRM (4.25.4.2.1):

• • • “Domicile The term “resident” in the transfer tax context is different from the definition of “resident” in the income tax context. Residence in the transfer tax context is based on the individual’s “domicile.”

    • Domicile is defined as living within a country with no definite present intent of leaving. Determining domicile for estate and gift tax purposes is fact specific. Once a non-citizen establishes the United States as their domicile, they remain a United States domiciliary until a new domicile is established.

    • If there is doubt as to the location of domicile, there is a rebuttable presumption that the decedent was domiciled within the country where he or she resided. See Treas. Reg. §20.0-1(b)(1).

    • If an examiner is examining a return of a decedent who was not a United States citizen, residence for estate tax purposes must be established by determining the decedent’s domicile at the time of death. The examiner will need to research current United States and foreign laws, and applicable estate tax treaties, to determine the correct transfer tax treatment for the decedent.

    • If there is a question about the decedent’s domicile at the time of death and the decedent was a resident of a U.S. possession, the examiner may contact International Accounts at the Philadelphia Service Center to determine whether Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, was filed by the decedent prior to death.”

Domiciled can be defined under 26 CFR § 20.0-1  as follows:

• • • (b) Scope of regulations –

      • (1) Estates of citizens or residents.

        • Subchapter A of Chapter 11 of the Code pertains to the taxation of the estate of a person who was a citizen or a resident of the United States at the time of his death. A “resident” decedent is a decedent who, at the time of his death, had his domicile in the United States. The term “United States”, as used in the estate tax regulations, includes only the States and the District of Columbia.

        • The term also includes the Territories of Alaska and Hawaii prior to their admission as States. See section 7701(a)(9). 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 removing therefrom.

        • Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal. For the meaning of the term “citizen of the United States” as applied in a case where the decedent was a resident of a possession of the United States, see § 20.2208-1. The regulations pursuant to subchapter A are set forth in §§ 20.2001-1 to 20.2056(d)-1.

Estate/Gift Tax vs Income Tax

The most important takeaway for taxpayers is that just because they are a US person for income tax purposes does not mean that they are a US person for transfer tax purposes. This is especially important for residents who are considering relocating out of the United States, and/or have a majority of their assets located outside of the United States — or are Long-Term Lawful Permanent residents who are considering expatriating. In any of those types of situations, taxpayers should be careful to plan ahead to reduce or eliminate US transfer tax liabilities.

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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

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