We know that taxes can be challenging. They’re challenging for many US citizens. But they get much more challenging for U.S. non-residents.
Add to it the complexity of the US estate tax system and all the international treaties and it makes the process very daunting.
In this post, we’re going to take a look at form 706-NA. Non-resident alien decedents must file this form.
The form is a little simpler to file compared to a traditional Form 706. It is actually only two pages long. It only has three parts. However, you often must attach many schedules and statements. This can make the process almost as lengthy as completing the basic Form 706. It really just depends on the different estate asset types (stocks, real estate, etc).
In this post, I will walk you through the first couple pages of IRS Form 706-NA and look at each specific section. Then we will also discuss some of the important schedules and how to complete them. Lastly, will touch briefly on the various international tax treaties that can help you reduce your U.S. estate tax liability. So let’s get started.
Table of contents
What is Form 706-NA?
Form 706-NA is for nonresident alien decedents to calculate their estate and generation-skipping transfer tax liability. Nonresident alien decedents owe the taxes on the transfer of the estate. Most people assume they only have a tax liability on the funds they actually receive.
By law, estates must provide the IRS and any recipients with the estate tax value of transferred assets. They must provide the report within 30 days of filing Form 706-NA. The value plays a role in what recipients can claim they sold or disposed of the assets for.
To report the information to the IRS, estates must file Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent.
When are you required to file IRS form 706-NA?
There are really two requirements. The person who passed away (also called the decedent). Must have been a non-resident alien. This means that they did not live in reside in the US and also we’re not a citizen.
The second requirement is that they have U.S. assets that are greater than the exemption amount. Here’s where I’ve got some good news and some bad news. The good news is that there actually is an exemption amount allocated to non-resident alien decedents. The bad news it’s only $60,000.
Such a small exemption amount won’t go too far if someone has vast real estate holdings or business interests. Hopefully, they did some estate planning before they passed away in order to mitigate some of the tax issues.
But just because someone has U.S. based assets that far exceed the $60,000 exemption amount doesn’t mean they will owe any U.S. estate tax. The U.S. has negotiated tax treaties with over 20 countries. Depending on the treaty, the estate tax for residents or citizens of these countries can be significantly reduced.
But these treaties have been slapped together over the last 50 or so years. In some situations, they appear incomplete and often a little confusing. In addition, while they do typically cover larger countries around the globe, they often don’t have treaties in place with many small countries. The IRS publishes a list of tax treaties and you can find them here.
Part One – Decedent, Executor and Attorney
This first part is relatively straightforward. You will need to enter in some basic information. Nothing too challenging.
You can attach supplemental documents and also any translation for the documents. Any amounts listed must be converted to U.S. dollars
IRS Form 706-NA Instructions
To complete the required Form 706-NA, you need the United States Estate Tax Return that corresponds to the year the decedent died. You must also include any schedules if you will claim any of the following deductions:
- Qualified conservation easement exclusion
- Tax credit for prior transfers
Also, if you answer ‘yes’ to these questions in Part III 5, 7, 8, 9a, 9b, or 11 you must attach the appropriate schedules.
Who Files Form 706-NA?
The estate executor must file Form 706-NA for any estates with a value exceeding $60,000. This includes all US assets and the gift tax exemption. If the amount exceeds $60,000, the form must be completed.
The gift tax exemption only refers to gifts made by the decedent from September 9, 1976 – December 31, 1976. Any amount gifted after this date isn’t excluded.
Completing Form 706-NA
Executors should complete Form 706-NA in this order – Part 1, Part 3, Schedule A, Schedule B, and Part 2. The estate can deduct normal deductions allowed, which reduces the tax liability since the tax is assessed on the gross estate minus deductions.
You’ll figure out the gross estate on Schedule A and the allowable deductions on Schedule B. Part 2 is done last because it’s where you calculate the total tax due.
Understanding Schedule A
To complete Schedule A, first gather a list of the assets in the estate. Only include assets from the United States, though. You’ll also enter assets outside of the United States, but on line 2 of Schedule B. You’ll then determine the entire gross estate which includes all property owned no matter where it’s located and includes the following:
- Full value of the property unless it’s owned with right of survivorship. If the spouse is a US citizen (not alien), then only half of the value is included.
- Any property the decedent and spouse owned as community property
- Any dower or curtesy interest from a surviving spouse
- Life insurance proceeds earned by all beneficiaries
- Any transfer of assets the decedent made before dying
- Any property the decedent owned with general power of appointment
- Some annuities to surviving beneficiaries
Any Necessary Attachments
If the decedent died with a will intact, include it with the Form 706-NA. The copy should be certified but if it’s not, include a Letter of Explanation stating why. No matter if the will is certified or not, a copy of the death certificate is required.
Any stocks you own requires a balance sheet as close to the valuation date as possible. You must also include a statement of the net earnings and dividends paid for the last 5 years. If there are any other necessary documents to determine an asset’s value, include them as well.
The executor of the estate must request an estate tax closing letter. They aren’t automatically issued. Form 706NA can take a long time to process, so it’s best to wait at least 9 months after filing it to request the closing letter.
If you need something sooner, you can request an account transcript. This shows all transactions included in the 706-NA. Your registered tax professional can get the transcript online using the Transcript Delivery System. Then you should be able to request a Transfer Certificate.
Understanding When to File
Form 706-NA must be filed within 9 months of the decedent dying. If you are unable to file within that time, you must request an extension (and it must be approved). Use Form 4768 Application for Extension of Time to File a Return to request the extension.
You’ll get an automatic 6-month extension. If you need more time because you are out of the country or have other extenuating circumstances, you can apply for an additional extension, but you must file Form 4768 again and this time include a written explanation why you need it.
Let’s consider the following important points:
- The executor of the decedent must identify U.S. situs assets. This includes real and personal property.
- The CPA should examine the total value of assets (gross assets) and can consider an alternate valuation date for the tax year.
- If the executor cannot file by the due date of the return, you can file for an automatic six-month extension. The tax bill can be made through the Electronic Federal Tax Payment System (EFTPS). Make sure your filing is done through private delivery service.
- The IRS may require additional information to determine the taxable estate and taxable gifts (if applicable). This could include a certified copy of the will or additional valuation details regarding the decedent’s gross estate.
- Many foreign countries have death tax treaties with the U.S. Check to see if your country has a treaty that addresses your filing threshold and possible specific exemption.
- Citizens of the United States use a different tax form (Form 706) for estate tax purposes.
- IRS instructions and specific rules require that the estate tax return must be filed before the IRS can issue Form 5173 (Federal Transfer Certificate).
By now you should have a good idea how the federal estate tax works for a nonresident alien decedent. The IRS website has some good general information. But you will need to get a quality CPA and attorney.