Have you received a recent gift from a foreign person? While the reporting threshold is high if the gift is from foreign estates or nonresident aliens, if the gift is from a foreign partnership or foreign corporation, the threshold is much lower. All foreign gift amounts from a trust distribution need to be reported. It is important to know the rules on foreign gift reporting so that you do not end up paying a severe penalty.
A foreign gift is an amount that is received by a U.S. person from a foreign person. There are various thresholds that may require you to report the amount of the gift to the IRS. If the gift is from a foreign estate or a nonresident alien, you only need to report the amount if the total amount of gifts is more than $100,000 for the tax year. On the other hand, if the gift is from a foreign partnership or foreign corporation, there is a much lower threshold. For the 2018 tax year, this threshold is $16,067. A foreign gift from a trust distribution needs to be reported as a distribution, no matter the amount.
Though reporting is only required if you are aware that the donor is a foreign person, the penalty is severe if you do not file a report to the IRS when you should have, or if the information is incorrect or incomplete. The penalty may be equal to 5%, but not exceeding 35%, of the amount of the foreign gift for each month that you fail to report. This penalty does not apply to a failure to report a foreign gift if the failure is because of reasonable cause, not willful neglect. In order to avoid a penalty and comply with the rules for foreign gifts, you must file Form 3520 by April 15th following the end of a tax year. If you are granted an extension to file your personal income tax return, the due date for filing the form gets extended as well. Because foreign gifts are not subject to income tax, Form 3520 is an information return, rather than a tax return.
Gift taxes apply to the person giving the gift, not the person receiving the gift. This means that while the U.S. person receiving the gift might need to report it if it is over the threshold, it is the person giving the gift that may need to actually pay tax. However, foreign citizens usually do not have a U.S. gift tax liability. On the other hand, gifts from a U.S. person to a foreign person usually have the same rules as any gift that a U.S. person normally makes. For 2019, if the gift is above $15,000, a gift tax return must be filed. However, because of the lifetime exemption, which is currently $11.4 million, most U.S. persons giving a gift will not actually owe any tax.
Gifts that are received from related individuals must be aggregated to determine if you need to report. For example, if one nonresident gave you $40,000 and another related nonresident gave you $70,000, because the total is above $100,000, you will need to report the gift. On the other hand, if a nonresident gave a married couple each a gift of less than $100,000, because they are considered separate U.S. persons, the amounts would not need to be reported.
While there are different ways of treating gifts depending on who they are coming from or going to, there are also different rules for types of gifts received from foreign countries. For instance, a foreign gift does not include qualified tuition or medical payments made by a foreign person on behalf of a U.S. person.
There are special tax rules that impose a transfer tax on gifts from an expatriate. An expatriate is an individual who voluntarily relinquishes their U.S. citizenship for tax purposes. There are also specific techniques, such as gift-splitting, that can help you avoid reporting requirements. If you are dealing with an expatriate or gift-splitting, please contact your tax advisor for more information.
Since the penalty for not reporting foreign gifts can be so severe, it is important to know whether or not you need to report. If you have questions, please feel free to contact our office at (858) 558-9200.