Are American Expats Subject to Foreign Gifts Tax?

By ZM Ishmurzina

Receiving a foreign gift is a joyous time for American living abroad and foreign nationals residing in the USA. However, American expatriates and nonresident aliens must remember that they might have U.S. expat tax filing requirements in regards to the overseas gift. To determine whether a gift is subject to foreign gifts tax filing requirements and reporting on US expatriate tax returns, several things must be considered: residency of a gift recipient, type of donor, gift amount and type of gift.

This is the latest email from one of our clients, American expatriates living abroad and foreign nationals in the USA. “I received $120,000 gift from my aunt who is a Belgian citizen. This is a foreign bank account in Denmark. Should I report this foreign gift on my US expat tax return? Are there any overseas tax filing requirements and gifts tax in regards to this gift?”

Key US expat gifts tax filing requirements in case of a foreign gift

Gifts from US persons

Americans expatriates living abroad are subject to US gifts tax rules per Form 709 or Form 706 if they receive gifts from U.S citizens, green card holders and US persons (taxpayers who meet a substantial presence test).

Gift from a foreign person

American expatriates living abroad are subject to different US expat gifts tax reporting requirements in case of a gift received from a foreign person. Foreign person is a nonresident alien, foreign corporation, foreign partnership or foreign estate.

Definition of a gift per the IRS

Per the IRS, gift is “money or other property received by a US person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income.”

Foreign gifts over $100,000

American expatriates are subject to gifts tax reporting requirements on US expat tax returns if the aggregate value of foreign gifts exceeds $100,000. For example, an American expat receives a gift in the amount of $90,000 from a foreign person. In this scenario there are no US expat gifts tax reporting requirements in regards to this gift. However, if this foreign person’s sibling or a foreign company that this person owns makes another gift in the amount of $11,000, then American expatriates are required to file form 3520.

Foreign gifts in the amount of $14,165 (adjusted for inflation) and more

If American expatriates received a gift from a foreign corporation or foreign partnership (including foreign persons that are related to foreign corporations and foreign partnerships), then American expatriates are required to report this gift on form 3520, although, there is no gifts tax due.

Form 3520

This form is Annual Return to Report Transactions with Foreign Trusts & Receipt of Certain Foreign Gifts. The form 3520 must be filed by the due date of US expat tax returns including extensions.

Penalties for a Failure to file form 3520

The form 3520 to report gifts is for informational purposes only and there is no gifts tax due. However, a failure to file this form can result in significant penalties. American expatriates who failed to file form 3520 and report foreign gifts, will be subject to a penalty of 5% of the amount of the gift for each month that the form is not filed. The penalty can be as high as up to 25% plus statutory interest charged by the IRS Section 6039F.

Failure to report a gift from a foreign trust

In case of a foreign gift from a foreign trust, the penalty is the greater of $10,000, 35% of gross value of property received from a foreign trust, 35% of the gross value of any property transferred to a foreign trust, or 5% of the gross value of the portion of the trust’s assets treated as owned by a US person.

Conclusion

The US expat tax returns become more and more complicated. Foreign income exclusion, foreign housing exclusion and foreign tax credit are just ones of the many issues that American expatriates should be aware of. American expatriates are advised to contact an expat tax CPA if they have questions about gifts tax reporting, foreign gifts tax, foreign trust, foreign partnership, foreign controlled corporations and other overseas tax issues. It is important to contact international tax experts that can help navigate murky waters of the IRS. To learn more about international tax services provided by Artio Partners, please contact expat tax experts.