U.S. Taxes on Gifts Received from an Expatriate
When a U.S. Citizen or Long-Term Lawful Permanent Resident formally renounces their U.S. citizenship or relinquishes their Long-Term Lawful Permanent Residence, technically they are referred to as an expatriate. When a person is considered a covered expatriate there can be some heavy tax implications that occur even after they have expatriated. One common scenario is when a person who has already expatriated wants to give gifts to a U.S. person in subsequent years. It is important to note, that these rules apply when the expatriate is a covered expatriate, because if the expatriate is not a covered expatriate then these harsh tax rules simply do not apply. Let’s walk through the basics of what happens when a person receives a gift from a person who is expatriated and whether or not they have to pay Taxes.
Expatriate Gift Example
Louis was a U.S. citizen who had been naturalized after being a permanent resident for several years. He still has U.S. citizen family members who reside in the United States. When Louis expatriated from the United States, he was considered a covered expatriate. Now that his eldest daughter graduated from medical school in the United States he wants to gift her $1,500,000 to purchase a new home. The question becomes whether or not his daughter in the United States is subject to U.S. taxes on this gift.
General Form 3520 Reporting
In general, a U.S. person has to report a gift that they received from a non-resident alien in any year that the total value of the gift exceeds $100,000 if the gift is from an individual on Form 3520. In this type of situation, since Louis is a non-resident alien, his daughter would have to report the gift on Form 3520 since the total value of the gift exceeded $100,000. Typically, there would be no tax on this type of gift, but because Louis was a covered expatriate the rules are different.
Gift Tax and (Proposed) Form 708
In this situation, since Lewis is considered to be a covered expatriate, there are gift taxes due for the recipient of the gift. In accordance with section 2801, whenever a U.S. citizen or resident receives a gift from a covered expatriate, the United States imposes a tax equal to the highest tax rate specified (40%). Moreover, it is not the person who gave the gift who is required to pay the tax but actually, the U.S. person recipient who must pay the tax. There are some exceptions, but they’re limited and can be found in section 2503. In addition, foreign tax credits may apply as well to reduce the amount of gift or estate tax due.
*These types of transactions should be reported on Form 708, but to date (2023) the form has still not been published.
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