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The two most important types of taxes to keep in mind are:
- Income taxes and
- transfer taxes. These include estate tax, gift tax, and generation-skipping transfer tax (GSTT).
As far as the first of them, the tax rate is directly related to the total income and deductions claimed. As far as transfer taxes are concerned, even though it’s true that tax rates are related to the market value of the assets at the time of the transfer, whether alive or dead, paying taxes is somewhat linked to the owner’s total exemptions. While citizens and residents (legal or undocumented) have a 2019 exemption which is equivalent to $11,400,000 per person, non-resident foreigners only have an exemption equivalent to $60,000 dollars. Yes, you read right. There is a huge difference between these amounts because the U.S. government is not interested in giving the same tax benefits to foreign citizens.
There are contradictions among different legal commentators due to the amendments to the law made in January 2013. At that time, the GSTT was omitted from the uniform treatment of foreigners, and citizens or residents like the other two transfer taxes, when the exemption was still at $1 million dollars. However, when the exemption was increased later on, the omission was not corrected which pretty much has kept up in the air whether the $11,400,000 GSTT exemption also applies to foreigners.
Keep in mind that there are ways to legally plan for a decrease, and in some cases, the removal of said taxes. It is important to clarify to the readers that planning for one tax is not necessarily compatible with planning for any of the other taxes. This means that income tax planning may not necessarily mix well with estate or gift tax planning. A lot of people want to have one overall strategy or plan that meets all their objectives, but this is impossible because both tax types are different tax systems.