In the United States, the concepts of domicile and residency play a large part in determining the amount of taxes they owe. For people who spend time in the United States but are not U.S. citizens, which tax rates apply to you depend on a few different factors, including the amount of time you spend in the country. When you begin to plan your estate, you will need to figure out if the IRS considers you a resident or non-resident and where you are domiciled.
The IRS distinguishes between residents and nonresidents for income tax purposes. Residents are taxed the same as U.S. citizens on worldwide income. Non-residents are taxed under special IRS rules. For example, nonresidents are taxed on income derived from U.S. sources or from a U.S. trade or business, but not on income from non-U.S. sources.
If you are not a U.S. citizen, you are a resident if you:
- Have a green card (have permanent resident status), or
- Pass the Substantial Presence Test.
The Substantial Presence Test measures how many days you spent in the U.S. in the current year and the past five years. There are quite a few reasons that certain days would not count toward the test, including days you are in the U.S. for less than 24 hours. The days that people with certain types of visas spend in the U.S. also do not count toward the test.
For estate tax purposes, the IRS looks to domicile rather than residency. Determining someone’s domicile is totally different than determining residency based on the green card test or Substantial Presence Test. Usually, domicile in the U.S. means living here with no “definite present intent of later leaving”, so planning to remain here indefinitely.
The IRS looks at many circumstances to determine domicile, including visa status, type of visa, number of days spent in the U.S., location of family members, and more. If you move out of the country, your domicile may not change to the new country for quite a while.
Non-domiciled people’s estates must pay estate taxes only on their assets within the United States. In contrast, the estates of people domiciled here must pay estate taxes on their worldwide assets. The difference in taxes can run to the hundreds of thousands of dollars depending on the amount and value of assets.
For tax and estate planning purposes, your residency and domicile make a big difference in the amount of income, gift, and estate taxes assessed. If you are a non-resident – even if you are domiciled in the U.S. -- you may need to change your estate plan or your spouse’s estate plan to account for potential adverse tax consequences.
Are you thinking about 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.