Taxation Of Foreign Individuals And Us Citizens In Foreign Countries

<p> The maximum civil penalty for non-willful failure to comply with FBAR reporting requirements is $10,000.<a href="#_ftn1">¹</a> However, additional penalties may apply for willful violations. Penalties for a willful failure to file can be as much as the greater of $100,000 or 50 percent of the amount in the account at the time of the violation.<a href="#_ftn2">²</a> These penalties can be imposed for failure to file or for failure to maintain the required records (see Q ). </p><p> The statute of limitations for civil or criminal violations is generally six years for FBAR purposes, meaning that the total penalties for failure to file for multiple years could be more than the value in the account. </p><p>These dollar values are adjusted annually for inflation. In 2025, the penalty for a non-willful failure to comply is $16,536 and $165,353 or 50 percent of the amount in the account at the time of violation for a willful failure to comply.<a href="#_ftn3">³</a></p><p>The Tax Court has ruled that FBAR penalties are not taxes imposed under the Internal Revenue Code, so taxpayers are not entitled to the notice and other requirements of IRC Section 6330. The taxpayers in the case had submitted a request to the Treasury Department's Debt Management Servicing Center (DMSC) to request a Collection Due Process (CDP) hearing.<a href="#_ftn4">⁴</a></p><p><hr></hr></p><p><strong>Planning Point:</strong> On multiple occasions, disputes have arisen over whether the $10,000 maximum penalty for non-willful FBAR filing failures is to be imposed on a per-account basis or a per-taxpayer basis. </p><p><hr></hr></p><p> Both the Ninth Circuit and a Texas district court previously held that the total non-willful FBAR penalties that can be imposed on an individual should be limited to $10,000 per FBAR report, rather than $10,000 per financial account.<a href="#_ftn4">⁵</a> However, the IRS continued to attempt to assess penalties on a $10,000 per-account basis. That position was accepted in the Fifth Circuit. The U.S. Supreme Court has now clarified that non-willful FBAR penalties should be imposed on a per-report basis, rather than a per-account basis.<a href="#_ftn5">⁶</a></p><p> The test for willfulness is generally whether there was a voluntary, intentional violation of a known legal duty. The IRS has the burden of establishing willfulness. Willfulness is shown by the person's knowledge of the reporting requirements and the person's conscious choice not to comply with the requirements. In the FBAR situation, individuals should know is that they have a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR. </p><p><hr align="left" size="1" width="33%"></hr></p><p><a href="#_ftnref1">1</a> 31 U.S.C. 5321(a)(5)(B)(i). </p><p><a href="#_ftnref2">2</a> 31 U.S.C. 5321(a)(5)(C). </p><p><a href="#_ftnref3">3</a> <em><em>See</em></em> <a href="https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar">https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar</a>. </p><p><a href="#_ftnref4">4</a> Jenner v. Commissioner of Internal Revenue, 163 T.C. No. 7 (2024).</p><p><a href="#_ftnref4">5</a> See <em>U.S. v. Boyd</em>, 991 F.3d 1077 (9th Cir. 2021) and <em>U.S. v. Bittner</em>, 469 F. Supp. 3d 709 (E. D. Tex. 2020). </p><p><a href="#_ftnref5">6</a> <em>U.S. v. Bittner,</em> No. 21–1195 (Feb. 28, 2023)<em>.</em></p>

<p>U.S. individuals residing abroad may become subject to both the FBAR and FACTA reporting rules, and the corresponding penalties for noncompliance, based upon their participation in foreign retirement plans. </p><p> Generally, a U.S. individual who has an interest in any "foreign account" is required to file an FBAR (Form TD F90-22.1) if the aggregate value of foreign accounts exceeds $10,000 at any time during the calendar year.<a href="#_ftn1">¹</a> The IRS has issued regulations that specifically exempt certain accounts, including plans that qualify under IRC Section 401 and IRA accounts, but these regulations do not provide a similar exemption for <em>foreign</em> retirement accounts.<a href="#_ftn2">²</a> Therefore, whether FBAR reporting will be required for a U.S. individual's foreign retirement accounts will likely turn upon whether the individual has a "financial interest" or "signature authority" over the foreign account. </p><p> Penalties for failure to file an FBAR can be steep—for willful violations, the civil penalty can equal the greater of $100,000 or 50 percent of the account assets, and the IRS may be entitled to file criminal charges.<a href="#_ftn3">³</a> For non-willful violations, the penalty can still equal up to $10,000 per violation unless the taxpayer can show that there was reasonable cause for failure to file, in which case no penalty is imposed.<a href="#_ftn4">⁴</a></p><p> Because of the steep penalties imposed upon taxpayers who do not comply with FBAR reporting obligations, the IRS has issued guidance to allow certain "low risk" nonresident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 to catch up on filing delinquent U.S. income tax returns and FBARs with respect to their foreign accounts. Whether an individual is "low risk" or not will be determined based on the amount of U.S. income tax owed (less than $1,500 per tax year is low risk), and these delinquent returns will be processed in a streamlined manner absent any other high risk factors.<a href="#_ftn5">⁵</a> The plan is described by the IRS as a method to provide assistance to U.S. citizens residing abroad, including dual citizens, with foreign retirement plan issues.<a href="#_ftn6">⁶</a></p><p> In addition to FBAR filing requirements, a U.S. individual may be required to comply with FATCA and report any foreign financial assets with an aggregate value of over $50,000 (or higher amount, if the Secretary otherwise provides) on Form 8938, Statement of Specified Foreign Financial Assets, attached to his or her U.S. tax return.<a href="#_ftn7">⁷</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a> <em><em>See</em> </em>IRS "FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) – Financial Accounts," available at <a href="https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar">https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar</a> (last accessed June 17, 2026). </p><p> <a href="#_ftnref2">2</a> <em><em>See</em> </em>IRS Guidance: "Report of Foreign Bank and Financial Accounts (FBAR)," available at <a href="https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar">https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar</a> (last accessed June 17, 2026). </p><p> <a href="#_ftnref3">3</a> 31 USC § 5321(a)(5). </p><p> <a href="#_ftnref4">4</a> <em><em>See</em> </em>IRS FS-2011-13 (Dec. 2011). </p><p> <a href="#_ftnref5">5</a> <em><em>See</em></em> IRS Instructions for New Streamlined Filing Compliance Procedures for Nonresident, Non-Filer U.S. Taxpayers, available at <a href="http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-US-Taxpayers">http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-US-Taxpayers</a> (last accessed June 17, 2026). </p><p> <a href="#_ftnref6">6</a> IR-2012-65 (June 26, 2012). </p><p> <a href="#_ftnref7">7</a> IRC § 6038D(a).</p>

<div class="Section1"><br /> <br /> The estate tax computation base of a nonresident alien&rsquo;s estate consists of his or her taxable estate plus any taxable gifts made during his or her lifetime.<a href="#_ftn1" name="_ftnref1">¹</a> The taxable gifts of a nonresident alien made after 1976 (other than gifts included in the gross estate) also form part of the tax base upon which the estate tax is computed. The adjusted taxable gifts of a nonresident alien are computed in the same manner as for a resident citizen.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Once the taxable estate of the nonresident alien decedent is determined, the mechanics of the actual tax calculation and the applicable rate schedule (before the unified credit) are the same for nonresident alien decedents as for citizen-residents. However, a very important difference comes into play in the use of the unified credit, which is greatly reduced for nonresident alien decedents. This, of course, indirectly results in a higher effective tax rate. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="964">964</a> for a discussion of the unified credit as applied to nonresident aliens.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2101(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2101(b), (c).<br /> <br /> </div></div><br />

In some cases, a U.S. individual will continue to earn U.S. Social Security credit if liable for Social Security and Medicare taxes on amounts earned while performing services as an employee in a foreign country. The IRS has issued guidance that provides that Social Security and Medicare taxes continue to apply to wages paid for services performed by a U.S. individual abroad if any of the following are true:<br /> <p style="padding-left: 40px;">(1)     The individual is working for a U.S. employer,</p><br /> <p style="padding-left: 40px;">(2)     The individual performs services in connection with a U.S. aircraft or vessel and the individual has (a) entered into an employment contract in the U.S. or (b) the vessel or aircraft touches down at a U.S. port while the individual is employed on it,</p><br /> <p style="padding-left: 40px;">(3)     The individual is working in a country with which the U.S. has entered a Social Security agreement providing that the foreign earned income is subject to U.S. Social Security and Medicare taxes, or</p><br /> <p style="padding-left: 40px;">(4)     The individual is working for a foreign affiliate (a foreign entity in which the U.S. employer has at least a 10 percent interest) of a U.S. employer under a voluntary agreement (under IRC Section 3121(l)) entered into by that employer and the U.S. Treasury Department.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> The IRS guidance further provides that an individual is "working for a U.S. employer" for purposes of (1), above, if the individual is working for (a) the U.S. government (or instrumentality thereof), (b) another individual who is a U.S. resident, (c) a partnership in which at least two-thirds of the partners are U.S. residents, (d) a trust, in which all of the trustees are U.S. residents or (e) a corporation organized in the U.S., or in any U.S. state (including D.C., the Virgin Islands, Guam, American Samoa and the Northern Mariana Islands).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A U.S. employer who voluntarily enters into an agreement to extend Social Security coverage to its employees working in a foreign country is liable for the entire amount of the covered employees' Social Security taxes that would otherwise apply under Sections 3101 and 3111 if those employees were employed domestically.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRS has advised that U.S. individuals who are working in a country with which the U.S. has entered a Social Security agreement providing that the individual's income will <em>not</em> be subject to U.S. Social Security taxes obtain a statement from the relevant agency in the foreign country stating that the individual's income is subject to Social Security coverage in that foreign country.<br /> <br /> The U.S. Social Security Administration (SSA) will issue determinations that a U.S. individual's income is subject only to U.S. Social Security taxes if the employer contacts the SSA and provides certain basic identifying information about that individual and his or her employment abroad.<br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     See IRS Guidance: "Social Security Tax Consequences of Working Abroad," available at http://www.irs.gov/Individuals/International-Taxpayers/Social-Security-Tax-Consequences-of-Working-Abroad (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     IRC § 3121(h).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     IRC § 3121(l)(1)(A).

<div class="Section1"><br /> <br /> The unified transfer tax credit in the case of a nonresident alien decedent is only $13,000.<a href="#_ftn1" name="_ftnref1">¹</a> This effectively exempts only the first $60,000 of his or her taxable estate from estate tax, a considerably lower threshold than applies to a domestic decedent.<br /> <br /> A special rule applies if the decedent was a nonresident of the United States, but resided in a U.S. possession (e.g., Puerto Rico, Guam) and was a U.S. citizen only because of birth or residence in, or citizenship of, the possession. Under these circumstances, the decedent is considered to be a "nonresident noncitizen,"<a href="#_ftn2" name="_ftnref2">²</a> and the estate of a decedent in this category qualifies for a credit that is the greater of:<br /> <blockquote>(1)     $13,000, or<br /> <br /> (2)     $46,800 multiplied by the ratio that the value (at death) of that part of the decedent's gross estate that is located in the U.S. bears to the entire value of the decedent's gross estate.<a href="#_ftn3" name="_ftnref3">³</a></blockquote><br /> In either case, the credit may not be more than the amount of the estate tax.<a href="#_ftn4" name="_ftnref4">⁴</a> Further, the amount of the available credit is reduced by the value of any lifetime gifts made by the nonresident alien-decedent.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     IRC § 2102(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     IRC § 2209.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     IRC § 2102(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>     IRC § 2102(b)(4).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>     IRC § 2102(b)(3)(B).<br /> <br /> </div>

<div class="Section1"><br /> <br /> The general rule that a U.S. citizen or resident alien is taxed on all worldwide income applies in the case of a sale of real property in the same manner as income from any other source.<a href="#_ftn1" name="_ftnref1">¹</a> Therefore, a U.S. citizen or resident alien who sells real property that is located in a foreign country must report and abide by U.S. tax rules relating to the sale of real property (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7845">7845</a>).<br /> <br /> Thus, for example, a U.S. citizen who sells a principal residence that he or she has used as a principal residence for two of the five preceding tax years is entitled to exclude a portion of the gain from taxation in the U.S. in the same manner as though the property was located within the U.S. (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7845">7845</a>).<br /> <br /> Though the U.S. citizen or resident alien may also be required to pay taxes upon disposition of foreign-located real property both in the U.S. and in the country in which the property is situated, he or she will be entitled to claim a credit for certain foreign taxes paid on his or her U.S. tax return.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Further, a U.S. citizen or resident alien may be entitled to deduct any real property taxes that are imposed by a foreign country on his or her U.S. tax return.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>&nbsp;&nbsp;&nbsp;&nbsp; See IRS Publication 544.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>&nbsp;&nbsp;&nbsp;&nbsp; See IRS Publication 54.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>&nbsp;&nbsp;&nbsp;&nbsp; IRS Pub. 54.<br /> <br /> </div></div><br />

<p>The foreign housing exclusion applies to housing costs paid for with employer-provided funds (including amounts paid by the employer to the employee as taxable foreign earned income), while the foreign housing deduction applies to an individual who pays for foreign housing with self-employment earnings. </p><p> The foreign housing exclusion (or deduction) allows an individual to exclude (or deduct) amounts spent on housing costs while residing abroad, provided that the individual's tax home is found to be in a foreign country and the taxpayer meets either the bona fide residence test or the physical presence test.<a href="#_ftn1">¹</a></p><p> An individual's "housing amount" is the total housing costs for the year <em>minus</em> a base amount that is tied to the maximum foreign earned income exclusion for the year. The amount is 16 percent of the maximum foreign earned income exclusion ($132,900 in 2026, $130,000 in 2025, $126,500 in 2024, $120,000 in 2023, $112,000 in 2022, $108,700 in 2021, $107,600 in 2020, $105,900 in 2019, and $103,900 in 2018, as indexed for inflation),<a href="#_ftn2">²</a> calculated on a daily basis, and multiplied by the number of days spent abroad in the tax year.<a href="#_ftn3">³</a></p><p> Housing expenses that qualify for the exclusion or deduction must be reasonable, and can also include housing expenses for the individual's spouse and/or dependents if they live with the individual while abroad.<a href="#_ftn4">⁴</a> The cost of purchasing real property, furniture, accessories or other improvements to increase the value of the property are excluded from the definition of housing expenses for purposes of the exclusion (or deduction). Expenses relating to housing, such as the cost of utilities and insurance, are included in the definition of housing expenses for purposes of the exclusion (or deduction).<a href="#_ftn5">⁵</a></p><p> The amount of a taxpayer's foreign housing exclusion (or deduction) cannot exceed the amount of foreign-earned income for the tax year. </p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a> IRC § 911(a)(2). </p><p> <a href="#_ftnref2">2</a> Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40, Rev. Proc. 2025-32. </p><p> <a href="#_ftnref3">3</a> IRC § 911(c)(1). </p><p> <a href="#_ftnref4">4</a> IRC § 911(c)(3). </p><p> <a href="#_ftnref5">5</a> IRC § 911(c)(3).</p>

<div class="Section1"><br /> <br /> Unlike a U.S. citizen, who is subject to estate taxation on worldwide assets, the gross estate of a nonresident alien (meaning, a foreign individual who is not a U.S. citizen or resident alien) only includes property that is situated in the U.S. at the time of the nonresident alien's death.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> For purposes of determining what property is situated in the U.S., any property which the decedent has transferred, by trust or otherwise, which would be taxable within the provisions of IRC Sections 2035 through 2038 (relating to termination of certain property interests within three years of death, transfers with a retained life estate or to take effect at death, and revocable transfers), is deemed situated in the United States if it was so situated either at the time of the transfer or at the time of death.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> For a decedent who was a nonresident alien at the time of death, property is considered located in the U.S. if it falls into any of the following categories:<br /> <blockquote>(1)     Real property located in the U.S.;<br /> <br /> (2)     Tangible personal property located in the U.S., including clothing, jewelry, automobiles, furniture or currency. Works of art imported into the U.S. solely for public exhibition purposes are not included;<br /> <br /> (3)     A debt obligation of a citizen or resident of the U.S., a domestic partnership or corporation or other entity, any domestic estate or trust, the U.S., a state or a political subdivision of a state or the District of Columbia; or<br /> <br /> (4)     Shares of stock issued by domestic corporations, regardless of the physical location of stock certificates.<a href="#_ftn3" name="_ftnref3">³</a></blockquote><br /> However, in the case of a nonresident alien who dies while in transit through the U.S., personal effects are not considered located in the U.S. Neither is merchandise that happens to be in transit through the U.S. when a nonresident alien owner dies.<br /> <br /> The IRS has also addressed certain assets and found that they are specifically excludible from a nonresident alien's gross estate as being "without the U.S." The following non-exhaustive list of the property owned by a nonresident alien is <em>not</em> considered to be situated within the U.S. for calculating the gross estate:<br /> <blockquote>(1)     A bank account that is not used in connection with a U.S. trade or business;<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> (2)     A deposit or withdrawable account with a savings and loan association chartered and supervised under federal or state law or an amount held by an insurance company under an agreement to pay interest on it. But the deposit or amount must not be connected with a U.S. trade or business and must be paid or credited to the decedent's account;<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> (3)     A deposit with a foreign branch of a U.S. bank if the branch is engaged in the commercial banking business;<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> (4)     A debt obligation, the interest on which would be exempt from income tax under IRC Section 871(h)(1), relating to tax-exemption for interest earned by nonresident aliens with respect to portfolio debt investments;<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> (5)     Stock issued by a corporation that is not a domestic corporation, even if the certificate is physically located in the United States;<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> (6)     An amount receivable as insurance on the decedent's life;<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> (7)     Certain original issue discount obligations;<a href="#_ftn10" name="_ftnref10">¹⁰</a> and<br /> <br /> (8)     Certain stock that a nonresident alien owns in a regulated investment company (RIC) at the time of his or her death.<a href="#_ftn11" name="_ftnref11">¹¹</a></blockquote><br /> If the decedent was a citizen or resident of one of the countries with which the U.S. had an estate tax treaty in place, the provisions of the treaty may override the normally applicable provisions of the Internal Revenue Code that are outlined above.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>       IRC § 2103.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>       IRC § 2104(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>       Treas. Reg. § 20.2104-1(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>       <em><em>See</em></em> IRS Guidance: "Some Nonresidents with U.S. Assets Must File Estate Tax Returns," available at http://www.irs.gov/Individuals/International-Taxpayers/Some-Nonresidents-with-US-Assets-Must-File-Estate-Tax-Returns (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>       IRC §§ 2105(b)(1), 871(i)(3).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>       IRC § 2105(b)(2).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>       IRC § 2105(b)(3).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>       IRC § 2104(a).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>       IRC § 2105(a).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>     IRC §§ 2105(b)(5), 871(g)(1).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>   IRC § 2105(d).<br /> <br /> </div>

<p>While many U.S. citizens and residents who are transferred abroad by multinational employers may continue to be covered by the multinational&rsquo;s U.S. retirement plan, in some cases, a U.S. individual may obtain benefits under a foreign plan. Because U.S. citizens and residents are taxed on their worldwide income, benefits accrued under foreign retirement plans may be subject to U.S. taxation absent a treaty provision that provides otherwise. Most treaties provide that a pension or annuity received from a foreign employer is taxed in the country of residence under its domestic laws.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Treaties with some countries provide for liberalized treatment of retirement accounts&mdash;for example, the treaty between the U.S. and the U.K. provides that U.S. citizens residing in the U.K. can deduct, for U.S. tax purposes, amounts contributed to a pension plan established in the U.K.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Further, while a U.S. individual residing abroad may exclude a portion of foreign earned income from U.S. gross income each year, the foreign earned income exclusion does <em>not</em> apply to income received as a pension or annuity while abroad<a href="#_ftn3" name="_ftnref3">³</a> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3559">3559</a>).<br /> <br /> <hr><strong>Planning Point:</strong><p> The IRS has released long-awaited proposed regulations clarifying the income tax withholding obligations when distributions from employer-sponsored plans (including pension, annuity, profit sharing, stock bonus or deferred compensation plans) are made to destinations outside the U.S. While U.S. payees can elect to forgo withholding, non-U.S. payees cannot. In general, the participant cannot elect to forgo withholding with respect to these distributions even if the participant provides a U.S. residential address, but directs funds to be delivered to a destination outside the U.S. If the participant provides a non-U.S. residential address, withholding obligations cannot be waived even if the participant directs that the funds be distributed to a U.S. financial institution. When the participant provides no residential address, withholding obligations cannot be waived.<br /> <br /> </p><hr><p><br /> <br /> Technically, a plan established in a foreign country cannot be &ldquo;qualified&rdquo; under IRC Section&nbsp;401, because of the requirement that a qualified trust be organized under U.S. law.<a href="#_ftn4" name="_ftnref4">⁴</a> Therefore, a U.S. individual participating in a foreign retirement plan would not be entitled to defer taxation of contributions to the foreign plan in the same manner as would be available in the U.S., absent a treaty provision to the contrary.<br /> <br /> However, plans established by certain U.S. multinationals that are established under foreign law may achieve the same tax result if the plan is otherwise qualified.<a href="#_ftn5" name="_ftnref5">⁵</a> IRC Section&nbsp;404(a)(4) provides a special rule that allows for the qualification of a trust established outside of the U.S. if the employer contributing to the plan is a U.S. resident, corporation or other entity and the plan is otherwise qualified.<br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>&nbsp;&nbsp;&nbsp;&nbsp; See IRS Guidance, &ldquo;The Taxation of Foreign Pensions and Annuities,&rdquo; available at http://www.irs.gov/Businesses/The-Taxation-of-Foreign-Pension-and-Annuity-Distributions (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>&nbsp;&nbsp;&nbsp;&nbsp; See the Treasury Department Technical Explanation of the Convention between the U.S. and U.K, Article&nbsp;17, available at http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;911(b)(1)(B).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;401(a).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;404(a)(4).</p></p><br />

<div class="Section1"><br /> <br /> A nonresident alien's taxable estate is determined by deducting the following items from the alien's gross estate:<br /> <blockquote>(1)     Expenses, indebtedness, taxes and losses. These items may be deducted only in the proportion that the value of the decedent's gross estate in the U.S. bears to the value of the entire estate, wherever situated.<a href="#_ftn1" name="_ftnref1">¹</a> Thus, the deductible portion of each item is limited to the amount of each item multiplied by a fraction, the numerator of which is the value of the property located in the U.S., and the denominator of which is the value of the entire gross estate, wherever located.<br /> <br /> (2)     Charitable bequests. Charitable bequests are fully deductible if made to organizations meeting the requirements for an estate tax charitable deduction under IRC Section 2055 and are computed in the same manner as similar deductions allowed the estates of U.S. citizens and residents.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> (3)     Marital Deduction. The marital deduction is not available for property passing to a surviving spouse who is an alien (either a resident alien or a nonresident alien) unless the property passes to the spouse in a qualified domestic trust (QDOT) or is placed in a QDOT before the date on which the decedent's estate tax return is filed.<a href="#_ftn3" name="_ftnref3">³</a> The policy behind this limitation is that if the surviving spouse is an alien, there is a considerable likelihood that the marital deduction property will eventually be moved abroad, and not be taxable upon the death of the surviving spouse. This possibility can be eliminated, however, through the QDOT mechanism, which assures that the property in question will remain subject to U.S. estate tax upon the death of the surviving spouse.</blockquote><br /> <em>Allowance of Deductions.</em> A deduction is allowed only if the executor discloses in the estate tax return the value of that part of the gross estate not situated in the U.S.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     IRC § 2106(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     IRC § 2106(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     IRC § 2056(d).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>     IRC § 2106(b).<br /> <br /> </div>