October 26, 2016
More than 50 US tax figures are changed each year due to inflation. Here are some of the 2017 tax items that are adjusted for inflation.
- Unified estate and gift tax exclusion amount $5,490,000 per person; was $5,450,000
- Annual gift tax exclusion remains the same, at $14,000
- Gifts to non-citizen spouse will be $149,000; was $148,000
- Reporting foreign gifts and inheritances from individuals remains at $100,000 (in aggregate during the year), but gifts from foreign corporations and partnerships will be $15,797; was $15,671
- Expatriation – average annual net income tax will be more than $162,000; was $161,000
- Expatriation – mark-to-market exclusion will be $699,000; was $693,000
- Foreign earned income exclusion will be $102,100; was $101,300
What does all of that mean?
If you are a US citizen or resident, including many green card holders living abroad, you are generally subject to US estate tax on your worldwide estate. The 2017 exemption amount of $5,490,000 means the estates of that size or less will have no US federal estate tax owning. Residents of Canada that are not US citizens or green card holders and have US assets subject to estate tax, will also have the $5,490,000 exemption available to them on a pro-rated basis.
A gift tax exists to prevent people from giving away their assets to avoid income or estate tax. However, the IRS allows any person can make a gift to any other person of $14,000 or less with no gift tax consequences. When gifts are between spouses, the rules change a bit. If the receiving spouse is a US citizen, then the gift exclusion is unlimited. If the receiving spouse is not a US citizen, the gift exclusion is $149,000 per year. Because the estate and gift tax laws are unified, when the gift exceeds the exclusion amount, the gift givers estate exclusion is used. For example, assuming you are a US taxpayer, if you provide a gift of $20,000 to your neighbor in 2017, you would have to decrease the estate exemption by $6,000 and your remaining estate exemption would then be $5,484,000.
Gifts are never taxable to the person receiving the gift, but there may be reporting requirements such as when you receive a foreign gift or an inheritance. If you are a US taxpayer and receive a gift or inheritance from a Canadian friend or family member, you must report that gift or inheritance on IRS Form 3520 if it exceeds $100,000 per year, or $15,979 per year, if received from a non-US corporation or partnership.
If you give up your US citizenship, you are deemed to do so for tax reasons if:
- Your average annual net income tax for the five years preceding is more than $162,000, or
- Your net worth is $2 million or more, or
- You fail to file IRS Form 8854 certifying you have complied with all US federal tax obligations for the preceding five years.
If any of the above applies, you must file and pay an exit tax based on any income earned for the part-year, plus any deferred income such as unrealized capital gains and tax deferred savings accounts. However, you are allowed an exemption from tax on the first $699,000 of income.
If you are a US taxpayer living and working overseas and paying taxes in that foreign county, you can earn up to $102,100 of “earned income” free of US tax.
— Dale A. Walters (email@example.com) is the Chairman of the Board of KeatsConnelly.