Taxes on Gifts and Inheritances in the US: Key Principles

The US tax system for gifts and inheritances is one of the most detailed in the world. Its primary purpose is to regulate the transfer of wealth between generations.

✦ Gifts: The gift tax is paid by the donor, not the recipient. This means the recipient is exempt from any tax obligations if the gift is properly reported. Donors must, however, monitor the available US exclusions (annual and lifetime), which we will discuss in detail in future posts.

✦ Inheritance: The estate tax is levied on the deceased’s estate before assets are distributed to heirs. It depends on the total value of the estate, including real estate, financial investments, and personal property. US citizens and tax residents can use the lifetime exclusion to reduce the taxable value of the estate.

✦ Role of domicile: Tax obligations depend on residency status. US citizens and tax residents are taxed on all their assets worldwide, while non-residents are taxed only on assets connected to the US (US situs property). It’s important to note that the rules for determining tax residency for gift and estate taxes differ from those applicable to income taxes.

Understanding these taxation principles and planning ahead can help minimize tax liabilities for both gifts and inheritances.

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