A question we’re often asked by clients is whether US citizenship has inheritance tax implications, or put otherwise – is there an inheritance tax for US expats?
One of the reasons this issue is misunderstood, perhaps, is because of the similarity between the concepts of “inheritance tax” and “estate tax,” which are in fact similar, but not nearly identical.
In this blog, we compare and contrast these concepts to help clarify, once and for all, whether and how the inheritance tax operates in the world of US expats.
INHERITANCE TAX VERSUS ESTATE TAX
The main conceptual difference between an inheritance tax and an estate tax lies in who is responsible to pay the tax upon the death of the individual.
An inheritance tax generally must be paid by the beneficiary of the inheritance (i.e., the surviving recipient). The tax amount is calculated separately for each individual beneficiary once the assets of the deceased have been distributed.
In contrast, an estate tax must be paid by the estate of the deceased upon the passing of the individual, before distribution to the beneficiaries.
Countries generally impose one type of tax or the other, but not both.
THE US ESTATE TAX
The US federal government does impose an estate tax on the transfer of your property at death. In general, the estate tax applies to all property owned by a US citizen (and to US property owned by a non-US citizen). The maximum estate tax rate is currently 40%.
A US citizen can currently (in 2019) shield up to $11.4 million of property from the estate tax and, as a result, a very low percentage of taxpayers actually encounter this tax.
In addition to the federal estate tax, 13 states impose an estate tax, the rate of which varies from state to state.
INHERITANCE TAX IN THE USA
In contrast, the US federal government does not impose an inheritance tax. Rather, just a handful of states impose the tax.
As of 2018, only 6 states (Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) impose an inheritance tax in the USA. Even if you live in one of those states, certain beneficiaries (such as a spouse) are exempt from paying the tax, while other beneficiaries (such as children) enjoy a significantly reduced tax rate.
In any event, since most US expats are not subject to state taxation because they are domiciled abroad, the issue of inheritance tax very rarely comes into play.