Ep 42: What Is English For "Gift And Estate Taxes"?
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There is a huge difference between the gift and estate tax. This is highly magnified based on your immigration status (U.S. residents and non-resident aliens (NRAs)).
We also explain the annual exclusion for gifts, the unified tax credit, and the importance of tax planning to navigate these complex tax laws.
The conversation highlights the need for careful planning to avoid significant tax liabilities, especially for non-resident aliens with U.S. assets.
Some Key Takeaways
A gift tax is applicable during the lifetime of the giver.
The estate tax is assessed after a person's death.
The annual exclusion allows gifting up to $19,000 without tax in 2025.
Non-resident aliens have a much lower exemption of $60,000, while U.S. tax residents have $13.99 million - set to sunset in 2025.
Planning is crucial to manage tax liabilities effectively.
Understanding domicile is key for tax implications.
Future episodes will delve deeper into the tax and financial planning strategies that will help with the above.
Episode Links & Resources
Are you Tax-compliant With Your Overseas Assets? - Free Guide - Scroll to the bottom of the page.
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Jane Mepham, CFP® (00:05)
We're back with one of our favorite formats, what we call a Shortie episode, in which in 10 minutes or less, we take a term used in the cross-border space and we give you 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, because 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 Manasa, you want to jump into this right away?
Manasa Nadig, EA (00:48)
Yes, so a gift tax is on a gift. There is an estate tax, which is on the estate. 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 lifetime exclusion on the estate. So basically, 20,000 feet view of what is a gift tax and what is an estate tax. You want to go more into that,
Jane Mepham, CFP® (01:41)
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 gifter, the person who is gifting, right? Whereas in other countries, it tends to be the opposite. So we're just going to stick with the US for now. And then of course, the estate tax is on the estate. And if the estate or some taxes that has to be paid before the assets can be
distributed to the beneficiaries. 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 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 were 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 gift taxes owed on it because that gets carried forward to your final estate taxes. There's that whole thing, you know, the unified credit. You know what I'm talking about, Manasa?
Manasa Nadig, EA (03:11)
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 two separate lifetime exemptions or rather lifetime tax exemptions for gifts and estate taxes.
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.
Jane Mepham, CFP® (03:52)
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're a US resident, tax resident, so things like the citizen, green card holder, you're in the US, 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?
Manasa Nadig, EA (04:50)
Yes.
Jane Mepham, CFP® (04:51)
and you have
Manasa Nadig, EA (04:51)
Yes.
Jane Mepham, CFP® (04:51)
what's called US Situs assets. This is stuff that's in the US. Your exemption is not $13-ish million. Your exemption is only $60 million at death So what this means,
Manasa Nadig, EA (05:08)
You mean $60,000.
Jane Mepham, CFP® (05:10)
yes, I'm sorry, $60,000. Yes,
Manasa Nadig, EA (05:13)
$60,000.
Jane Mepham, CFP® (05:15)
I think that was just wishful thinking, $60,000.
Manasa Nadig, EA (05:17)
Yeah.
Jane Mepham, CFP® (05:19)
And that number has been $60,000, I think for as long as we can go back. It hasn't changed.
Manasa Nadig, EA (05:26)
Yeah.
Jane Mepham, CFP® (05:28)
Probably because 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're an NRA, you're not domiciled in the US, you have US Situs assets, you get the $60K exemption, and then if you have more than $60K, your estate is gonna have to pay estate taxes on this, which could be up to 40%. Anything you wanna add to that?
Manasa Nadig, EA (06:12)
Kind of hard to come in after that, Jane. But yeah, the big thing here is, you know, the planning part of it, right? Which being a Shortie, 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 taking into consideration what your total lifetime exclusion would be and how you're going to structure all that. So that's definitely a big plan that should be done definitely earlier than later, I think. And yeah, that's more or less what I would like to add at this point.
Jane Mepham, CFP® (07:06)
And
actually to your point, that number is really scary. Think about
Manasa Nadig, EA (07:11)
Yes.
Jane Mepham, CFP® (07:12)
you own a house and let's
Manasa Nadig, EA (07:14)
Mm-hmm.
Jane Mepham, CFP® (07:14)
say the house is worth a million and you get an
Manasa Nadig, EA (07:17)
Mm-hmm.
Jane Mepham, CFP® (07:17)
exemption of only $60 K, which basically means your family almost has to sell the house to be able to pay
Manasa Nadig, EA (07:26)
Yeah.
Jane Mepham, CFP® (07:26)
the 40 % taxes. But to your point with very careful planning,
you can actually
Manasa Nadig, EA (07:32)
Mm-hmm.
Jane Mepham, CFP® (07:33)
avoid this number. The key thing in today's episode is we just want to introduce this so you're aware of it and then
Manasa Nadig, EA (07:39)
Yes.
Jane Mepham, CFP® (07:41)
understand how IRS looks at it. So start understanding what's called domicile, 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. you're
and I'll rate anything else you want to.
Manasa Nadig, EA (08:03)
One thing just so people would know that 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 of 2026, all of those numbers will go back to what they were before 2018.
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, it's really quickly adding up to that $5 million, most likely if you have RSUs and the house in California, let's say.
Again, coming back to the planning part of it. So yes, and we will, I think we need to address the rest of it on a different episode, right Jane? Yes.
Jane Mepham, CFP® (09:02)
Yes, yes, we probably need to talk
about the planning that we can do or what
Manasa Nadig, EA (09:07)
Yes.
Jane Mepham, CFP® (09:07)
are some of the things you can do to kind of avoid this. Absolutely. This is just an intro.
Manasa Nadig, EA (09:10)
Yeah,
Jane Mepham, CFP® (09:11)
Yeah.
Manasa Nadig, EA (09:12)
yeah, yeah, 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. Bye.
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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.