With ever changing demographics and the aging of the baby boomer generation more and more situations arise where U.S. residents or citizens are receiving gifts from family or others who are not residents, citizens or otherwise in the U.S. (Non U.S. Persons). These gifts can lead to gray areas in terms of tax treatment.
The basic rule for gift tax is that the person giving the gift (the donor) pays tax. The person receiving the gift (the donee) does not count the gift as income for tax purposes. There is an annual exclusion to this tax, an amount you may gift without incurring gift tax. This is currently $14,000 annually. Spouses may also gift unlimited amounts to each other without owing gift taxes.
When the donor is a Non U.S. Person, gift tax may or may not be owned. (NB the situation is different if the Non U.S. Person is an expatriate.) The tax treatment of the gift depends on several factors, chief among them just what exactly is being gifted. The relevant terms of art are tangible versus intangible property and whether or not the property is situated within the U.S. While some situations are straightforward, for example a house geographically in the United States is tangible property situated in the U.S., gifts are often the transfer of liquid cash and these situations are considerably less clear. IRS regulations, the Internal Revenue Code, and case law on these questions do not provide a clear, single answer.
Before getting to those other factors we must first decide if what is being transferred is U.S. Property. The answer is not simple and within the IRS itself there are contradictory pronouncements as to what is and what is not U.S. Property.
One of the classic examples is the transfer of jewelry. If the transfer is made in the U.S. then it is U.S. property thereby creating a gift tax liability on the donor. Instead of jewelry, what if the gift is made by handing the donee a check? Is that U.S. property? If the gift transfer is made via wire transfer is that sufficient to keep it from being classified as U.S. property? Is an actual transfer of cash required to avoid classification of U.S. property? Notwithstanding actual Internal Revenue Code sections on the point, the IRS itself is not in total agreement in classifying each of these methods.
Once past the issue of U.S. property, the analysis next turns to where the transfer takes place. What if the Non U.S. Person transfers funds from their bank account in a U.S. branch of a U.S. or foreign financial institution? What if the Non U.S. Person transfers funds from their foreign account of a foreign financial institution to the dome’s account in a U.S. branch of a U.S. or foreign financial institution? What if the Non U.S. Person transfers funds from their foreign account of a foreign financial institution to the dome’s account in a foreign branch of a foreign institution? Once again, there are conflicting pronouncements and legal holdings among these various scenarios.
Regardless of how and where a gift transfer is made, any U.S. Person receiving a gift or inheritance from a Non U.S. Person is required to file IRS form 3520 if the gift is over a certain threshold. Note this reporting obligation is on the recipient not the donor.
Horowitz Law Offices represents clients in issues related to the receipt of foreign gifts. You are welcome to contact us at 312 787 5533 or firstname.lastname@example.org.