- 1 How Estate Tax Treaties May Limit Taxation (But Not Reporting)
- 2 Which Taxes Are Covered Under Estate Tax Treaty?
- 3 How the Estate Tax Treaty Works
- 4 Limitations and Exceptions to an Estate Tax Treaty
- 5 Reporting Still Required Despite Estate Tax Treaty
- 6 Form 3520 Reporting
- 7 Golding & Golding: About Our International Tax Law Firm
How Estate Tax Treaties May Limit Taxation (But Not Reporting)
The United States Government has entered a variety of different double-taxation agreements with different countries. And, while income tax treaties tend to be the most common, there are several other types of tax agreements as well such as FATCA (Foreign Account Tax Compliance Act) and Totalization Agreements — which help minimize Taxpayers from having to pay into two different social security systems. One of the lesser-known types of tax treaties is the estate tax treaty. The US government has entered into significantly fewer estate and gift tax treaties than it has income tax treaties or other types of agreements (around 16) with foreign countries. One important aspect of the estate tax treaty is that while it may limit having to pay estate tax or gift tax in two different countries for the same asset — it does not minimize or eliminate the international reporting requirements for US Persons who receive gifts and inheritances from foreign countries. Let’s go to the basics of an estate tax treaty.
Which Taxes Are Covered Under Estate Tax Treaty?
From a US tax perspective, the state tax truly impacts how federal-estate tax will be applied to a US person who may have already paid estate tax in a foreign country
How the Estate Tax Treaty Works
For example, let’s say a person is a US citizen and resides in either the United States or a foreign country — and they have assets abroad in the foreign country that they just inherited so that they have to pay an estate tax or similar tax to the government of the foreign country. If the tax treaty was not in place, then the person may have to pay an estate tax both to the foreign country as well as to the United States – – because the United States’ tax rules allow it to levy estate tax against entire estate — both domestic and foreign assets. But, with the tax treaty in place it allows the Taxpayer to claim a credit for taxes paid to the foreign country which can then be applied against US estate tax — so that the person does not pay double tax on the same asset.
Limitations and Exceptions to an Estate Tax Treaty
There are several limitations and exceptions to applying the estate tax credit, which can be determined by whether the asset is considered a US asset or a Foreign asset. While items such as immovable property are generally going to be considered an asset in the country where the property is located — other items such as investments and personal property is not as straightforward.
Reporting Still Required Despite Estate Tax Treaty
It is important to keep in mind, that even though there may be a gift and estate tax treaty in place, US person taxpayers who have assets abroad such as accounts, investments, assets, and other income-generating properties are still required to report this information to the US government (such as FBAR and FATCA). Depending on whether the assets are owned individually or through an entity will help determine whether or not the asset is reportable. It is important to keep in mind, that even though there may be a gift and estate tax treaty in place, US person taxpayers who have assets abroad such as accounts, investments, assets, and other income-generating properties are still required to report this information to the US government. Depending on whether the assets are owned individually or through an entity will help determine whether or not the asset is reportable.
Form 3520 Reporting
When a US person receives a gift — including inheritance –– from a foreign person, they may have to file an IRS Form 3520 to report the gift/inheritance. The failure to do so may result in significant fines and penalties, although these penalties may be avoided, abated, or removed through one of the offshore amnesty programs.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax and specifically IRS offshore disclosure.
Contact our firm today for assistance.