Ep 40: What is English for "Top 10 Cross-Border Tax Blunders"?
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We've seen a lot of mistakes made by individuals filing taxes, particularly focusing on immigrants, foreign nationals, and green card holders living overseas.
In today's Shortie, we list these critical mistakes, hoping you'll avoid making them.
They range from ignoring taxes, ignoring immigration status, forgetting to report overseas gifts, including foreign dependents, all the way to completing the backdoor Roth wrong.
We also address those overseas with expired green cards who are ignoring their tax obligations.
If you find yourself in this situation, please contact a tax pro to help you rectify these issues and hopefully avoid what could be a huge tax penalty.
Onto the 10 mistakes.
Episode Links & Resources
Are you Tax-compliant With Your Overseas Assets? - Free Guide - Scroll to the bottom of the page.
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Speaker 1 (00:06):
Welcome to the International Money Cafe podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host, Jen Hams, certified financial planner, founder and owner of Elgon Financial Advisors.
Speaker 2 (00:21):
And I'm your host, man Nadik, enrolled agent, owner and founder of AM and Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance, and financial planning. Let's get to the show.
Speaker 1 (00:43):
We are back with one of our favorite formats, what we call a shorty episode, in which in 10 minutes or less we take a time used in the cross-border space and we give you, you know, a high level definition of what it is, of course, with the intention that we'll come back to it and talk about it in more details in future. 'cause unfortunately, most of these topics tend to be rather complex. So in today's episode we're going to answer a very specific question. We want to answer the question, what is a gift tax and how does that differ from an estate tax? So mana, you wanna jump into this right away?
Speaker 2 (01:24):
Yes. So a gift tax is on a gift <laugh>, there is an estate tax which is on the estate. The two big differences are, well the one major difference between the two is a gift is made during the lifetime of a person gifting, whereas the estate is after the person has passed away. So a gift tax is whatever's taxable after the annual exclusion and an estate tax is taxable after taking the uh, lifetime exclusion on the estate. So basically very, very 20,000 a feet view of what is a gift tax and what is an estate tax. You wanna go more into that Jing?
Speaker 1 (02:21):
Yeah, so what I like is when we talk about a gift tax in the US IRS code, a gift tax is paid by the gift tour, the person who is gifting, right? Whereas in other countries it tends to be the opposite. So we're just gonna stick with the US for now. And then of course the estate tax is on the estate and if the estate owe some taxes, that has to be paid before the assets can be distributed to the beneficiary. So in terms of when I think of a gift tax and where this applies to us, you have what's called an annual exclusion in 2025, the annual exclusion is I think about 19,000. So it's pegged to, it's pegged to inflation, which means you can give anybody, they don't have to be related to you up to 19,000 and not have to worry about paying gift taxes on that. If it goes beyond the 19,000, you are liable to pay a gift tax on it. But what happens, and this is where now we talk about the lifetime exclusion, you basically just need to file a gift tax return, but there's really no give taxes ordered on it. 'cause that gets carried forward to your final estate taxes. This, that whole thing, you know, the unified credit, you know what I'm talking about? Manasa?
Speaker 2 (03:49):
Ah, the unified tax credit. So if you go look at the definition of the unified tax credit, basically that is the IRS's transfer tax Unified, which means it combines like two separate lifetime exemptions or rather lifetime tax exemptions for gifts and estate taxes. And this combined exemption limit then applies to all taxable gifts you make to others during your lifetime and assets you leave to your beneficiaries through your estate state,
Speaker 1 (04:32):
Which is a great explanation. So as long as this is now where of course it starts getting a little tricky, as long as you are a US resident tax resident, so think like a citizen green card holder, you are in the us you, you are able to avail yourself of this 19,000 that applies to everybody as well as the lifetime exclusion of about 14 ish million. Well, up until this year we'll see what happens with the tax code. So it really means if your assets are around 14 million and you pass away this year, you'll probably be able to gift away the people inheriting your money. They'll be able to get it without having to pay estate taxes on it. Again, this is a very simplified view. Now the main difference, and this is why we kind of want, we wanted to talk about this, is if you're an NRA, right?
Speaker 2 (05:29):
Yes. Yes.
Speaker 1 (05:30):
And you have what's called US assets. This is stuff that's in the us Your exemption is not 13 ish million. Your exemption is only 60 million a death. So what this means, you
Speaker 2 (05:48):
Mean 60,000?
Speaker 1 (05:49):
Yes. I'm sorry. 60,060. Yes. I think that was just wishful thinking. 60,000
Speaker 2 (05:57):
<laugh>. Yeah.
Speaker 1 (05:58):
And that number has been 60,000 I think for as long as we can go back it hasn't changed. Yeah, probably 'cause there hasn't been anybody pushing it in the US system to change it. But that's a topic for another day. So 60,000, what this means is if you pass away and there's a whole process they'll use to figure out that you are an NRA, you are not domiciled in the us you have USS assets, you get the 60 K exemption, and then if you have more than 60 K, your estate is gonna have to pay estate taxes on this, which could be up to 40%. Anything you wanna add to that?
Speaker 2 (06:50):
Kinda hard to come in after that Jane <laugh>. But yeah, the big thing here is, you know, the planning part of it, right? Which being a shorty, we won't go into this, but the importance of planning and then the importance of kind of having a big picture in mind as far as where you might be, where your children might be or your beneficiaries might be, and you know, taking into consideration what your total lifetime exclusion would be and how you're going to structure all that. So that's definitely, uh, big plan that should be done, you know, definitely earlier than later I think. And yeah, that's more or less what I, I would like to add at this point.
Speaker 1 (07:42):
And, and actually to your point, that number is really scary. Think about you own a house in mm-hmm <affirmative> Let's say the house is worth a million and you get an exemption of only 60 K, which basically means your family almost has to sell the house <laugh> to be able to pay the 40% taxes. But to your point, with very careful planning mm-hmm <affirmative>. You can actually avoid this number. The key thing in today's episode is we just want to introduce this so you are aware of it. Yes. And then understand how IRS looks at it. So start understanding what's called domicile, what's he us side, us, and then what planning can we do to help you get around this? So all is not lost, there's hope for you, but if you don't plan, this could be an issue if you are NRA
Speaker 2 (08:38):
One thing, just so people would know that where we are talking about the $13.99 million in lifetime exemption, know that that is supposed to sunset at the end of 2025 and as of January 1st, 2026, all of those numbers will go back to what they were before 2018. And that number was much less, it was $5 million. And if you are a non-resident alien who is here in the US and you live on the West coast and work for one of the big tech companies, you know, it's, it's really quickly adding up to that $5 million most likely if you have RSUs and the house in California, let's say. So again, coming back to the planning part of it, so yes, and we'll, we'll, I think we, we need to address the rest of it on a different
Speaker 1 (09:37):
Episode, right? Yes. We, we, we probably need to talk about the planning that we can do. Yes. Or what are some of the things you can do to kind of avoid this? Absolutely. This is just an intro. Yeah,
Speaker 2 (09:46):
Yeah, for sure. So dear listener, thank you for being here and we love to bring you these shorties where we can introduce you to these ideas of all of the legalese that is around foreign tax or any tax planning and other stuff that you need to know about. So thanks for stopping by. Take care.
Speaker 3 (10:08):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only, and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross order finances and tax needs.
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The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.