The interaction of foreign tax laws and United States estate tax laws can create unfair treatment for people who have to pay taxes in both countries. Fortunately, in some cases foreign tax credits may apply to reduce tax liability for estates.
What Is a Foreign Tax Credit?
A foreign tax credit is a credit applied against United States federal taxes, reducing the total amount of tax due. Foreign tax credits are only available if you paid taxes to a foreign country (or U.S. possession).
In the alternative, the United States offers possible deductions for foreign taxes you paid. The deductions reduce your total taxable income. But the IRS says that it may be more beneficial to take a tax credit rather than a deduction.
How Can Foreign Tax Credits Affect U.S. Estate Taxes?
When an estate pays estate taxes, it may need to make payments both to a foreign country and to the United States. Both the U.S. and some other countries assess estate taxes on citizens’ worldwide estates. If someone is not a citizen but owns property in a country, he or she may owe estate taxes there too.
As a result, an estate could pay taxes to two different countries on the value of the same assets. This is called double taxation. Further, some countries (including the United States) treat people who are not citizens differently for purposes of assessing estate taxes.
Foreign tax credits can lower the tax bill in the United States by eliminating or reducing double taxation or discriminatory tax treatment of non-citizens. By giving estates a break on taxes, the credits increase the possible inheritance to relatives of people with property in multiple countries. Estate tax treaties make these credits available.
The United States has estate tax treaties with many countries worldwide. In the treaties, the countries agree that citizens or people who own property in the countries will receive certain credits, deductions, or other tax treatment. They aim to reduce double taxation and redundancy when people are taxed in multiple countries. To learn more about estate tax treaties and foreign tax credits, talk to an estate planning attorney.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.