What Are the U.S. Tax Implications of Receiving Gifts from Foreign Citizens?

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What Are the U.S. Tax Implications of Receiving Gifts from Foreign Citizens?

When one individual gives property to another without receiving payment in return, the property is generally considered to be a “gift” for tax purposes. Depending on certain criteria, transactions of this nature may be subject to federal or state taxes (currently none in CA) known as “gift taxes.” While gift taxes are typically imposed only upon gift givers, gift recipients are still required to report gifts that meet IRS standards, including certain cash gifts received from foreign citizens. Failure to do so may result in the imposition of severe penalties, making timely and accurate reporting essential. Working with an experienced IRS international estate and gift tax attorney facilitates the reporting process, removing elements of stress and uncertainty while affording you greater protection from civil penalties. In the meantime, this article will help you to understand how gifts from non-U.S. citizens are reported and treated for tax purposes.

 

How Are Cash Gifts from Non-U.S. Citizens Taxed and Reported to the IRS?

Each day, countless U.S. taxpayers receive cash gifts from friends and relatives, some of whom also happen to be foreign citizens. For example, a citizen of Switzerland or expat in Singapore might send cash to a U.S. citizen via wire transfer to a U.S. bank (potentially triggering a tax audit or FATCA penalties in the process).

This scenario is commonplace in a world whose financial systems are increasingly interconnected. However, it also raises important tax questions for both the gift giver (called the “donor”) and the gift recipient (called the “donee”). For example, when a foreign citizen gives a gift to a U.S. citizen, which party is responsible for reporting the gift to the IRS: donor, or donee? At what threshold do gifts become reportable in the first place? And, perhaps most importantly, how do taxpayers report gifts properly, so as to avoid needless IRS penalties? Let’s take a closer look at each of these points.

  • Who pays gift taxes, the donor, the donee, or both parties? Under most circumstances, only gift givers, or donors, are subject to federal gift taxes. However, foreign citizens generally do not have liability for U.S. gift tax, and therefore are not required to report gifts for such purposes. Gift recipients must report certain gifts to the IRS, as the next point discusses in greater detail.
  • Note: As the IRS points out to taxpayers, “Under special arrangements the donee may agree to pay the [gift] tax,” rather than the donor, as is customary. If you are in this type of scenario, you should consult an experienced IRS tax attorney due to the complex tax planning considerations and IRS procedures involved.
  • Watch OUT for gifts of U.S. Situs Assets like U.S. real estate, Assets located in the U.S. and even stocks and bonds of U.S. companies. Gifts by nonresident aliens of U.S. situs assets will give rise to transfer taxes.   A $60,000 exemption will be allowed and any value in excess of the amount will be subject to a 40% gift / transfer tax.  If the IRS is unable to collect it from the nonresident alien, the U.S. recipient will become personally liable for it via the concept of transferee liability.
  • How much can be gifted tax-free in 2019? Gifts from foreign citizens must be reported to the IRS if they meet certain federal thresholds. For example, donees must report the gifts from (1) foreign estates and (2) non-resident aliens (e.g. aliens who do not possess green cards) which exceed $100,000 in value. Gifts from foreign corporations or partnerships must also be reported, but are subject to lower thresholds which are adjusted annually for inflation. For the 2018 tax year, this threshold is $16,076. For additional information, refer to the IRS’ frequently asked gift tax questions.
  • How do donees report gifts to the IRS? As stated above, donees must report gifts that surpass certain monetary thresholds. To report gifts from foreign citizens to the IRS, donees generally file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts). This filing requirement applies regardless of whether you receive one large gift, or multiple related gifts which add up to more than $100,000 in aggregate. As the IRS explains, the Form 3520 deadline “is the 15th day of the 4th month following the end of the U.S. person’s tax year.”

Penalties for non-filing the 3520 can be draconian.   The initial penalty is the greater of $10,000 or— 35% of the gross value of any property transferred to or received from a foreign trust if a U.S. person fails to report the creation of or transfer to a foreign trust or the receipt of a distribution from a foreign trust.

  • How much tax will I owe after filing? The good news is, a gift recipient should not owe taxes after reporting a gift from a foreign citizen on Form 3520. The bad news is that failure to file this form can lead to the imposition of hefty penalties, making timely compliance imperative.

Danger:   It is not recommended that an offshore relative wire funds directly into your U.S. accounts.   There is a risk the IRS or state tax authority could argue that for the millisecond that the transfer bounced around in U.S. Cyberspace the government had in rem jurisdiction and assert a transfer tax.  It is recommended that the U.S. recipient first open an offshore account and that the gift take place offshore and then the funds can be wired back into the U.S.  Do not forget to pick any income earned in the offshore account and to report it on an FBAR and form 8938 if applicable.

International Gift Tax + Estate Planning Attorneys for U.S. Citizens and Expats

Most U.S. citizens will never have to deal with the gift tax. However, if you make or receive a foreign cash gift, you should be mindful of the federal regulations governing taxes on gifts and bequests to Americans from expatriates, which will help to ensure your successful compliance. Of course, the most effective way to protect yourself and plan for the future is to work with a knowledgeable expat tax attorney, like those at the Tax Law Office of David W. Klasing. We provide award-winning international estate and gift tax planning services for non-citizens, U.S. citizens, and dual citizens. To set up a reduced-rate consultation with an experienced international tax law attorney, contact the Tax Law Office of David W. Klasing online, or call today at (800) 681-1295.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San BernardinoSanta BarbaraPanorama CityOxnardSan DiegoBakersfieldSan Jose, San FranciscoOakland and Sacramento.

 

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