Demystifying Form 706-NA: A Comprehensive Guide to Estate Tax Reporting for Non-U.S. Citizens

Posted on 08-06-2023 05:59 PM

Executor/personal representatives must file Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return when the gross estate, adjusted taxable gifts and gift tax specific exemption exceed the filing limit for the year of death.

Massachusetts real estate and tangible personal property should be entered on Line 1 of the July 1999 revision of Form 706. Do not reduce this gross value through mortgages, liens or debts.

1. Identifying the Decedent’s U.S.-Situated Assets

When someone dies, their estate may be responsible for US taxes on assets passed on to beneficiaries. Executors must calculate this potential tax liability using Form 706, while SmartAsset offers free financial advisor matching tools which connect people with experience filing the form.

As part of calculating a taxable estate, the first step should be identifying all of an estate's assets located within the United States as of its date of death - this figure is known as gross estate value.

First, subtract allowable deductions from the gross estate to arrive at its taxable estate value. Finally, include any taxable gifts made within nine months of death as well as amounts paid out for life insurance policies or annuities and generation-skipping transfer taxes that must be paid.

2. Identifying the Decedent’s U.S.-Situated Income

If the gross estate of a nonresident decedent exceeds the filing threshold amount, including their specific gift tax exemption and adjusted taxable gifts, an estate tax return must be filed on Form 706.

As part of an estate that elects portability of their deceased spouse's unused exclusion amount to their surviving spouse, executors of estates that utilize this strategy must file an estate tax return.

This return must be filed nine months from the date of death and may be extended up to six months if needed. A payment must be submitted at or before original filing deadline unless an extension request has been approved; unlike many IRS forms, Form 706 cannot be electronically filed; an authorized representative can request a closing letter but this letter will only be delivered to authorized recipients.

3. Identifying the Decedent’s U.S.-Situated Property

Executors of nonresident alien estates need to use Form 706 from the IRS website in order to calculate any federal estate and generation-skipping transfer tax liabilities. There is also an online version available.

First, identify all U.S-situated property owned by the decedent; this may include real property, tangible personal property and stock in American companies as well as debt obligations such as mortgages or loans owed by them.

Executors must establish the fair market value of these assets rather than their original purchase prices, before ascertaining if any are subject to death spousal unused exemption (DSUE) or other estate tax deductions. Any taxes due should then be reported on Page 2 of Form 706. Please make your check payable to "United States Treasury", and include your decedent's name, Social Security Number, and "Form 706, page 2" when sending payment.

4. Identifying the Decedent’s U.S.-Situated Credits

When someone passes away, their assets may be subject to federal estate taxes. This includes both property that remains within the United States as well as anything "skipped over" generations when passing down to beneficiaries - either situation may trigger tax liability and must be reported using Form 706.

Executors must use an American financial professional when filing Form 706. The Internal Revenue Service offers an online directory of qualified professionals as well as instructions for filing this form.

The value of the gross estate plus any allowable deductions (surviving spouse's marital deduction and charitable deduction are common examples), plus any possible allowable DSUE sum deductions is the taxable estate value. If an estate with an estimated gross value exceeding $5 million must file an estate tax return.

5. Identifying the Decedent’s U.S.-Situated Deductions

Form 706-NA, as its name implies, is designed to calculate tax liabilities associated with estates of noncitizen or resident individuals who passed away outside the US. Executors of such estates must file this return nine months posthumously if their gross estate (calculated with specific gift tax exemption and adjusted taxable gifts) surpasses the filing threshold; also executors who choose to transfer an unused exclusion amount (DSUE amount) between spouses must use Form 706-NA when filing such transfers.

Executors must report their gross estate, after subtracting allowable deductions in Part II. Furthermore, they must include in Part III any applicable generation-skipping taxes due and provide evidence as to its actual cost or fair market value when filing this report - such as an original cancelled check or statement from their financial institution.

6. Identifying the Decedent’s U.S.-Situated Tax Credits

Locating U.S. tax credits associated with the decedent is essential for calculating estate tax liability, including determining their gross estate in the U.S. and deducting allowable deductions before reporting the taxable estate on Schedule B. Furthermore, an estate must submit a statement outlining whether any benefits under a treaty will be claimed on its return.

Executors are required to file an estate tax return when the gross estate, combined with adjusted taxable gifts and specific gift tax exemption, exceeds the filing threshold. This must be done nine months after death; additionally any Washington state returns and their respective schedules must also be included along with any payments due. A check payable to United States Treasury should accompany Form 706 from IRS website with instructions available as PDF version.

7. Identifying the Decedent’s U.S.-Situated Marital Deductions

Executors of nonresident alien decedents must complete Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return. This form calcuates both federal estate tax and GSTT levied on gross estate values.

Taxwise, the gross estate includes all assets owned or held at the time of one's death - cash and securities, real estate, insurance policies, trusts, annuities and business interests - and valued according to fair market value, not necessarily what was paid or thought valued upon acquisition.

Some assets qualify for tax deductions such as the marital deduction and charitable deduction, making them non-count assets in an estate's gross estate value calculation. To properly identify this property, an extensive review of estate records must be performed as well as consideration given to where the decedent resided upon death.

8. Identifying the Decedent’s U.S.-Situated Charitable Deductions

Executors filing Form 706-NA must include a copy of their decedent's will when filing this form, with or without certification; otherwise they must include an explanation letter as to why it cannot be certified. Failure to include this will could subject an estate to penalties.

Executors must fill out Part 1 -- General Information

Executors must provide basic information about the estate and include its decedent as well as attach a copy of their death certificate. In addition, this part includes a checkbox asking if certain elections will be made by the estate such as electing to use special allowances and postpone tax payments, and whether to claim pro-rata shares of treaty-based unified credit exemptions (this question requires special expertise to answer correctly).

9. Identifying the Decedent’s U.S.-Situated Credits

Nonresident aliens owing property in the US when they pass away must file Form 706-NA in order to calculate their estate and generation-skipping transfer tax (GSTT) liability. This involves identifying their U.S-situated assets, determining their date of death values, adding their gift tax specific exemption amount and adjusted taxable gifts total together, then taking appropriate deductions into account.

Executors must consider funeral and administration expenses, claims against the estate, unpaid mortgages and liens, charitable donations and marital deductions when calculating taxable estate. Furthermore, if an estate plans on taking advantage of treaty benefits to reduce estate taxes, executors must submit a copy of said treaty along with an explanation that they rely upon it when calculating estate taxes; this form cannot be submitted electronically but must be sent within nine months from death date.

10. Identifying the Decedent’s U.S.-Situated Credits for State Income Taxes

Gross Estate of Decedent is determined by adding up all real or personal, tangible or intangible property owned at death, such as cash and securities, real estate, trusts, annuities and business interests owned at death by decedent. Also included are any lifetime taxable gifts made prior to death (subject to specific exemption and valuation adjustment limits; please see Instructions for Form 706).

Executors may lower the gross estate through deductions such as funeral and administrative expenses, debts owed against the estate and charitable deductions. The resulting "taxable estate" is then subject to federal and state estate taxes; if this exceeds $60,000 the executor should file Form 706-NA per the instructions and include a copy of their decedent's Tax ID Number on any checks used to pay any applicable estate taxes due.