Solving the Rubik’s Cube of Taxes, Residence, and Citizenship
One of the consequences of U.S. residence and U.S. citizenship is income taxation on worldwide income and gift, estate, and generation-skipping transfer taxes (collectively, “transfer taxes”) on worldwide assets. Alternatively, the scope of U.S. taxation of individuals who are neither U.S. residents nor U.S. citizens is more limited. For those with residence or citizenship in the U.S. and another country, taxation can be quite complex and typically involves the tax codes of multiple countries and, in some instances, tax treaties.
Consider, for example:
· A U.S. citizen living abroad;
· A non-U.S. citizen living in the United States; and
· A non-U.S. citizen living abroad with U.S. income and/or assets.
For a U.S. citizen living abroad, the U.S. tax analysis is relatively simple. U.S. citizens, no matter where they live, are subject to U.S. income tax on their worldwide income and U.S. transfer taxes on their worldwide assets. For U.S. transfer tax purposes, they are eligible for a $13.61 million transfer tax exclusion in 2024 ($27.22 million for a married couple). There are typically also tax considerations in the country of residence, and there may be a treaty with the country of residence to minimize double taxation.
For a non-U.S. citizen living in the United States, the U.S. tax analysis is more complicated. First, a determination is made as to whether they are a “resident” of the United States for federal income tax purposes. A person is a resident of the United States for income tax purposes if they are a “lawful permanent resident of the United States” (i.e, a “green card holder”) or they are “substantially present” in the United States, determined by a day-count test.
The residence test for transfer tax purposes is different – it is a domicile test. It is not dependent on a green card or day count, but rather on being present in the United States with no definite present intention of moving away later – a more subjective test than the objective test for income tax purposes. A person can be a U.S. resident for income tax purposes but not a U.S. domiciliary for transfer tax purposes. This is common for executives on assignment to the United States from abroad who intend to return “home”.
For a non-U.S. citizen not considered domiciled in the U.S., the transfer tax treatment is vastly different. Only assets located in the U.S. are subject to transfer tax (with differences in the types of U.S. assets taxed for the gift tax and the estate tax). And, importantly, there is no lifetime gift tax exclusion comparable to the $13.61 million exclusion for U.S. citizens and U.S. domiciliaries, and only a $60,000 exclusion for the estate tax.
For all persons subject to U.S. transfer taxes, there are also important differences in how transfers to a non-U.S. citizen spouse are treated, regardless of where the spouse lives. While transfers to a U.S. citizen spouse qualify for an unlimited marital deduction which allows for the tax-deferred transfer of property to a spouse, there is no unlimited marital deduction for gifts to a non-U.S. citizen spouse, only an annual gift exclusion amount ($185,000 in 2024). Transfers at death to a non-U.S. citizen spouse only qualify for a marital deduction with specialized “qualified domestic trust” planning.
The chart below summarizes the differences in the transfer tax treatment of individuals depending on whether they are either U.S. citizens or domiciled in the United States or, alternatively, neither U.S. citizens nor domiciled in the United States.
| Category | Non-U.S. Citizen Not U.S. Domiciled | U.S. Citizen or U.S. Domiciled |
| U.S. Estate Tax | Taxed on U.S. situs assets (real, tangible, intangible) | Taxed on worldwide assets |
| Applicable Exclusion Amount | $60,000, subject to treaty modified pro rata rules, only available for estate tax purposes, not available for lifetime gifts | $13,610,000 in 2024, available for estate, gift, and generation-skipping transfer tax purposes |
| U.S. Gift Tax | Taxed on gratuitous transfers of U.S. situs assets (real, tangible) | Taxed on all gratuitous transfers |
| Annual Gift Tax Exclusion | $18,000 in 2024; gift splitting with spouse not allowed | $18,000 in 2024; gift splitting with U.S. citizen/resident spouse allowed |
| Transfers to a Non-U.S. Citizen Spouse | · No unlimited marital deduction for transfers to non-U.S. citizen spouse · Lifetime gift to non-U.S. citizen spouse, annual gift tax exclusion is $185,000 in 2024 · Contribution rule for joint tenancy with non-U.S. citizen spouse; deferred gift · Estate tax marital deduction for transfers to qualified domestic trust | |
These tax rule differences, which are dependent on residence or domicile and citizenship, can be confusing, and the tax treatment in specific circumstances varies depending on the particular facts, including the countries involved and any available treaty benefits.
View the tax and treaty tables here.
U.S. Estate and Gift Tax Treaties
U.S. Income Tax Summary – Non-Resident Alien Taxpayers
Coordinated planning with U.S. and foreign country legal and tax advisors is recommended. If you desire guidance regarding the U.S. aspects of cross-border planning, please contact a member of LP’s Trusts & Estates Group.