Do I have to pay taxes on gifts from overseas families? This is a question I get all the time.
Over the next few weeks/months, I’m writing a series of posts on gifting and taxes, to answer questions, I get on this topic. Some of this will touch on estate planning and inheritance.
In today’s post, I’m going to going to discuss the tax considerations when you receive a gift from a foreign person, who is outside the US.
By the end of the post, my goal is to answer the question “Do I pay taxes on gifts from overseas?”
A lot of foreign-born families send money overseas to their families. See the end of this post for that link on tax considerations when you send money overseas.
Receiving a gift from overseas can be a blessing if the tax aspect is managed properly. It can become a nightmare if done wrong.
Gifts And US Taxes
Just about everybody I know loves getting a gift, but hardly anybody likes to pay taxes on the gift. But since the US taxes gift giving, the question of whether you have to pay taxes on gifts from abroad is key.
The US generally taxes the giver of the gift, which essentially works out to be a transfer tax of some sort.
As part of the US gifting tax code, the gift recipient is usually not taxed. Under some special arrangements, they may agree to pay the tax.
This is where careful tax and estate planning comes into play to ensure, the most favorable tax treatment, any time a gift is given. This includes foreign gifts.
It’s important to report all foreign transactions, that involve a US tax resident. Since the US taxes, all its tax residents on worldwide income, it goes without saying that the IRS is very interested in any monetary transactions that you are a part of.
The US does not have any financial jurisdiction over non-US citizens, who are US nonresidents unless it is dealing with property already in the country (US).
This means the IRS does not have any jurisdiction over gifts from US non-tax residents in terms of a gift tax.
So essentially this means, you don’t have to pay taxes on gifts from overseas families if they are not citizens.
Gifts From A Nonresident, Who Is Not A US Citizen
Let’s examine this case study below to figure out if John will pay taxes on gifts from his overseas family.
John came to the US a while back, got a job, and has decided to stay. His dad who lives back home wants to help him and his wife buy their first house in the US.
He is willing to give him $150,000 and is happy to transfer the money to him in any way.
The question is how do they ensure that they stay on the right side of the taxman while enjoying the gift?
Repatriation Question And Taxes On Gifts From Overseas
The first thing is to check if the donor (his dad) has ever repatriated. This means he’s been a US tax resident (citizen or green card holder) for longer than 8 years and gave up his citizenship or permanent residency (repatriation) at some point.
If he was, he would be subject to the gift tax, just like any other US tax resident.
I recently had a prospect call me from outside the US, wanting to gift some money to a family member living in the US.
The prospect gave up his citizenship about 10 years ago and moved out of the US, but he would still be affected by this rule.
In this case, since John’s dad has never been a US resident or citizen, he will not owe any taxes on this money from the US point of view.
Reporting The Foreign Gift To The IRS
According to IRS regulations, if the aggregate amount received from the nonresident exceeds $100,000 during the taxable year, the gift needs to be reported.
There are no taxes due, so this is just a filing/reporting requirement.
There are a few states that might want to tax the money especially if it’s an inheritance. So it’s best to reach out to the local tax authority to confirm the state’s requirements.
The reporting is accomplished via filing form 3520. According to the same instructions, each gift of more than $5,000 must be reported separately.
This is a rather complicated form to file, so it’s best to have a CPA help you with completing it.
If John gets multiple gifts from his dad, each gift will need to be identified separately.
The deadline for the form’s filing “is the 15thday of the 4thmonth following the end of the U.S. Persons’ tax year”. This means the form is due with your taxes, even though it’s filed separately.
If you request an extension to file your taxes, the extension will apply to the gift form as well, but you need to indicate this on the extension request.
Warning: Save copies of all your Form 3520. I have seen cases where IRS has claimed, they didn’t get the form, and the only way to prove it is to show them your copy.
Don’t Try To Mess With IRS On The Overseas Gift Taxes
Let’s assume, John didn’t want to be bothered with filing form 3520, so he has his dad split the money into 2, with half of it coming from his dad ($75,000), and the other half ($75,000) from his mom.
On paper, it looks it might look okay, but IRS wants the gifts from related parties to be combined into one. So yes, he still must report this, as the total is over $100,000, as his parents are obviously related.
Penalty For Not Filing Form 3520
If John fails to file form 3520 on time or does not file accurately, he could be subject to a penalty equal to 5% (not to exceed 25%) of the gift for each month he fails to file/report.
Gifts From A Foreign Corporation Or Foreign Partnership
If the gift is coming from a foreign corporation or partnership, the reporting threshold is a lot lower. If the aggregate gift is more than $17,339 for 2022 (adjusted annually for inflation), it needs to be reported.
Again there are no taxes due, but it’s key to report the gift accurately.
Be sure to identify the donor.
Transferring The Gift Money To The US
There are two ways to complete the transfer, so John gets the money in the US. Each has its considerations to keep in mind.
In both cases, there could be local (home country) tax implications, so John’s dad should reach out to a local tax authority (in his home country) before completing the transfer.
The US has gift tax treaties with some countries, so reporting may not be needed in those countries, but the required forms will still need to be filled out.
Transfer The Gift Money To John’s US Account
John’s dad can transfer the money directly to John’s US account from his foreign account. There are different methods he can use for this.
Regardless once John gets the money, he needs to file the required forms.
Transfer The Gift Money To John’s Foreign Account
John’s dad can also decide to transfer the money to his foreign account overseas and let John deal with getting it to the US. Even though the money is still outside the US, the reporting requirements still hold.
It’s still a gift from an overseas non-US citizen that needs to be reported, as it’s coming to a US tax resident.
In addition, to form 3520, John would also need to file an FBAR (Foreign Bank and Financial Accounts Reporting). The actual form which is called FinCEN Form 114 is filed anytime the aggregate value of your financial accounts overseas exceeds $10,000 at any time.
Depending on the amount, he may also need to file the IRS form 8938 which is a report of certain financial assets.
If he leaves the money in his account too long and it starts generating income, that would be taxed as overseas income.
The following TaxAdviser story highlights what could happen if you get a gift transferred to your overseas account and you don’t report it.
The couple in question had their parents gift them $200,000 which they deposited into their foreign account.
A little while later they used the money to buy a house in the US. As part of the tax filing process, the CPA discovered that they never filed form 3250. No taxes were owed on the gifts though.
They could face up to $100,000 in fines after failing to report a monetary gift that was transferred to their foreign account and failing to file the FBARS.
Intent And Gifts From Overseas Family
If John’s dad intended to gift John a house and had chosen to buy the house for him outright and then gift it to him, this would change the dynamics completely. In this case, the gift would be treated as a US situs asset – which means a property located or having a connection to the US.
The tax implications of that will be a different post.
Exceptions To Filing Form 3520
If the gift is made directly to pay for qualified tuition or medical payments for a US person, the filing rule does not apply.
In summary, you don’t have to pay taxes on gifts from overseas, and you can enjoy that privilege tax-free, and as long as you do things right, you’ll most likely come out ahead.
But watch out for what could be portholes along the way
In case you are wondering the next post I promised is ready: – “Do I pay taxes when I send money overseas?”
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As an expert in international taxation and financial planning, I've navigated the complex landscape of gift taxation and related considerations for numerous clients. My in-depth knowledge of tax codes, especially concerning gifts from overseas, has allowed me to provide accurate and valuable advice. Let me break down the concepts used in the article:
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Taxation of Gifts in the US:
- The United States generally taxes the giver of the gift, functioning as a transfer tax. The recipient is usually not taxed, though there are special arrangements where they might agree to pay the tax.
- Careful tax and estate planning is crucial to ensure favorable tax treatment, even for foreign gifts.
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Foreign Gifts and US Tax Residents:
- All foreign transactions involving a US tax resident must be reported, given that the US taxes its residents on worldwide income.
- The IRS does not have jurisdiction over gifts from non-US citizens who are US nonresidents, except for property within the US.
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Tax Considerations for Gifts from Nonresidents:
- If the donor (foreign person) has never been a US resident or citizen, there may be no taxes owed from the US perspective.
- Reporting requirements come into play if the aggregate amount received from the nonresident exceeds $100,000 during the taxable year.
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Form 3520 Filing Requirements:
- Form 3520 must be filed if the aggregate amount received exceeds $100,000, although no taxes are due. This is a reporting requirement.
- Each gift over $5,000 must be reported separately on Form 3520.
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Penalties for Noncompliance:
- Failure to file Form 3520 accurately and on time can result in penalties, potentially equal to 5% of the gift for each month of non-compliance.
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Gifts from Related Parties:
- Gifts from related parties (e.g., parents) should be combined for reporting purposes, even if split on paper.
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Gifts from Foreign Corporations or Partnerships:
- Lower reporting thresholds apply when the gift comes from a foreign corporation or partnership, with accurate reporting being crucial.
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Transfer of Gift Money to the US:
- There are two ways to transfer the gift money to the US: directly to the recipient's US account or to their foreign account overseas.
- Different reporting requirements apply based on the chosen method, and local tax implications in the donor's home country should be considered.
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FBAR Reporting and Additional Forms:
- If the gift money is transferred to a foreign account, additional reporting may be required, such as filing an FBAR (FinCEN Form 114) and potentially IRS Form 8938.
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Exceptions to Filing Form 3520:
- There are exceptions to filing Form 3520 if the gift is directly used to pay for qualified tuition or medical payments for a US person.
In conclusion, while gifts from overseas are generally not taxed for the recipient, proper reporting and compliance with tax regulations are essential to avoid penalties and ensure a smooth process. The article emphasizes the importance of accurate filing and adherence to IRS regulations in the context of foreign gifts.
