US Tax on a Kiwi Estate?

Lets talk about non-residents, and US tax. Whilst almost all of our articles and discussions are related to the tax implications of holding US citizenship in New Zealand, lesser discussed are the implications for a non-resident of the United States, and when a burdensome US tax exposure can occur.

In our article today, we’ll focus on estate tax. This is an issue which can be widely ignored, and tends to only rear its head at what we might say, is the worst timing.

Who is a US non-resident for tax purposes?

The first general rule of a US non-resident, is the person is not a US citizen. As discussed across our articles, the US ties tax residency to citizenship, and as a result all US citizens are considered tax residents of the USA.

Secondly, green card holders are by default, US tax residents, even if they don’t live in the United States. However, in certain situations, we are able to use the NZ US tax treaty (DTA) to treat a green card holder as non-resident of the USA for tax purposes.

So, finally, a non-resident of the USA is someone who:

-          Is not a US citizen

-          In most cases, is not a green card holder

-          Someone who doesn’t meet the substantial presence test (a day count of time spent in the USA)*

This generally means any Kiwi or other citizen or doesn’t reside in the US or have any other affiliation with the country will be considered non-resident for tax purposes.

*It is important to note, even a non-US citizen who meets the substantial presence test (ie greater than 183 days in the US) can sometimes be treated as a non-resident, using the tie-breaker residency test of the NZ US DTA.

 

Why would a US non-resident be subject to US tax?

This can come from having any US investments, or most importantly for the purpose of this article, any US situs assets upon the passing of the non-resident.

What are US situs assets?

US situs assets are in essence, anything you possess at the time of passing, which is physically in the US. This can be stocks, property or even cash through the form of retirement accounts or other financial interests.

Many Kiwi individuals hold US stocks through a portfolio, sometimes without considering the US tax implications.

Are US non-residents subject to estate tax?

Unfortunately yes, this is a possibility.

Whilst some quick online research can show you that the US estate and gift tax lifetime exemption has been increased up to $13.99m USD as part of the OBBBA (One Big Beautiful Bill Act), this is generally only available for US citizens. Broadly speaking, this means that the first $13.99m of a US person’s estate, is tax free in the United States.

This however is quite a different story for non-resident’s, and is where the US tax trap for foreigners comes into play.

What is the US estate tax threshold for non-residents?

The US estate tax threshold (or exemption) for non-residents is far lower than for US persons, and is a flat exemption of only $60,000 USD.

This means, most US situs assets included in the estate of a non-resident, are only tax free up to the first $60,000 in value.

 

The remainder is subject to a tax rate of 40%.

This means, for a New Zealand resident, with no connection to the United States other than owning some investments or assets there, may be subject to a tax of 40% on any of these assets over $60,000.

Probate in the US can also be a difficult process to handle from New Zealand, and usually, distributions of the US situs assets to the beneficiaries of an estate cannot occur until the US tax is paid.

Summary

As we can see above, for Kiwi estates holding assets in the US, this can be particularly troublesome at the time of someone’s passing, and can result a significant amount of the assets being subject to tax.

Effective US tax planning, and being aware that overseas investments can have complex tax obligations,  can prevent problems further down the line.

At The US Tax Team New Zealand, we provide US tax advice to both US citizens and non-citizens alike. Reach out to us – info@usatax.nz