- IRC Code Sections 6039F and 2801
As we discussed, below is brief information on the reporting and special tax payment requirements of a foreign gift from a relative or a friend overseas. The discussion below is of a general nature only and has not been adapted to your specific situation. This information is not intended to be tax or legal advice in any nature and form. A further evaluation of your specific situation including the $ value of the gift, or the vehicle used to make the gift, may make additional tax code provisions apply. These additional provisions, plus the ones discussed below, include laws in the U.S. state where the gift is received, as well as foreign country tax and other legal requirements that will also need to be evaluated. Feel free to call should you have any other questions as you learn more about the gift that you may receive.
Brief Information on US Tax code relating to gifts from foreign persons:
As an individual with relatives or friends overseas, one should be aware of information reporting requirements and special tax payment requirements that apply to certain large gifts or bequests from foreign persons.
If one, while a U.S. citizen or resident, received during the tax year either (1) more than $100,000 from a nonresident alien or a foreign estate, or (2) more than $10,000 (indexed to $15,102 for 2013) from foreign corporations or foreign partnerships, and if those amounts are treated as gifts or bequests, an information reporting requirement applies to such US citizen or resident on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is due on the date your federal income tax return is due, including extensions.
Failure to report such foreign gifts is subject to a penalty equal to 5 percent of the amount of the foreign gifts for each month for which the failure to report continues (not to exceed a total of 25 percent). No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.
Additionally, if a U.S. citizen or resident is subject to a special tax on the value of the covered gift or bequest received from a covered expatriate, the tax is imposed at the higher of:
(1) highest estate tax rate; or
(2) the highest gift tax rate in effect on the date of receipt, but only to the extent the gift’s or bequest’s value exceeds the annual exclusion amount in effect for the year.
A covered gift or bequest is generally any property acquired by gift directly or indirectly from an individual who is a covered expatriate at the time of the acquisition, or directly or indirectly by reason of the death of an individual who was a covered expatriate immediately before death.
The tax on any covered transfer is reduced by any gift or estate tax paid to a foreign country for the gift. The tax however does not apply to:
(1) any transfer of property that is reported as a taxable gift on a timely filed gift tax return of the covered expatriate, or included in the gross estate and included on a timely filed estate tax return of the covered expatriate’s estate, or
(2) certain transfers to charity or the covered expatriate’s spouse.
Covered transfers to a domestic trust are treated the same way as covered transfers to U.S. citizens or residents, with the tax being imposed on the trust. Covered transfers to foreign trusts are subject to the tax at the point any distribution attributable to the transfer is made from the trust to a U.S. citizen or resident. The recipient is allowed an income tax deduction for the special tax paid or accrued on the distribution from a foreign trust, but only to the extent the tax is imposed on the portion of the distribution that is included in the recipient’s gross income. A foreign trust can elect to be treated as a domestic trust for purposes of these rules.
Feel free to call me for any clarification you may need as the situation unfolds for you.
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See related page in 1040NR? or 1040?: U.S. Income Tax Returns for Visa Holders + International Organization and Foreign Embassy Employees, by Jean Mammen, EA
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