Approximately 13.5 percent of the current U.S. population is comprised of immigrants. As a result, there is an increasing demand for information about the correct handling of tax situations involving Green Card holders and both legal and illegal residents, such as foreign gift tax. Of course, with such a spotlight on ensuring that all government demands and requirements are met, it is essential to make sure you are in total compliance with reporting all types of income and submitting the applicable forms.
Are Foreign Gifts Taxable?
Some foreign gifts may be taxable. As you prepare your taxes, you must review the requirements to determine whether you should include gifts received from a foreign person in your taxable income, whether they be a cash gift from parents overseas or the transfer of real estate or other tangible properties.
The lifetime exclusions for foreign cash and real estate gifts are quite high, so many taxpayers feel that these taxes can be ignored or believe that they probably don’t apply to them. However, neglecting to report foreign gifts to a U.S. citizen, as well as not correctly filing the associated form(s), can result in penalties from the IRS.
To make sure you are in compliance with tax law, let’s take a look at what the IRS considers a foreign gift, why foreign gift reporting is so important and how to stay on top of the forms, due dates and additional documentation.
Foreign Gift Tax For Gifts From A “Foreign Person”
Nonresident alien parents often want to give gifts to their children who are U.S. citizens or Green Card holders. In such cases, the recipient needs to know if there is a tax on gifts from their parents. Unfortunately, these rules can be complicated and aren’t well-publicized. Below is some basic information to help you understand and apply these rules.
What Is A Foreign Gift?
The IRS defines a foreign gift as money or other property received by a U.S. person from a foreign person that the recipient treats as a gift and can exclude from gross income.
The person who receives the gift is known as the “donee,” while the individual providing the gift is known as the “donor.” If you are the donee, your gift isn’t reported as income, and you will not be required to pay an income or foreign gift tax. However, if the value of the gift is greater than a certain amount, you may be required to report it to the IRS. If required, you must report the gift on Form 3520.
What About A Cash Gift From Parents?
As with gifts from other foreign persons, cash gifts from parents who qualify as foreign persons don’t subject the recipient to taxes, and the recipient will not be required to include the gift in their gross income. If any foreign gift tax is required, the donor will be responsible for paying the tax on Form 709. However, the recipient/donee may still need to file an additional form to report the gift if it exceeds a certain amount.
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How About A Non-Cash Gift?
If you receive a non-cash gift from a foreign person, it may be taxable if it is U.S.-based property. There are differences in the foreign gift tax treatment of cash and property, in which a non-resident alien donor is subject to foreign gift tax on transfers of real and tangible property situated in the United States. However, the donee is still not responsible for paying the associated taxes.
Who Is A Foreign Person For Foreign Gift Tax?
According to U.S. tax law, a “foreign person” is a non-resident alien individual or foreign corporation, partnership or estate.
Examples of foreign persons include:
- Parents or other family members of a U.S. person who reside in another country
- A foreign estate from which a U.S. taxpayer receives real estate or other tangible properties
- A foreign business (unless it is tax-exempt) who gifts a taxpayer a particular amount of cash or other valuable property
When Must Foreign Gift Tax Be Reported On The Form 3520
As a Green Card holder, a person is considered a U.S. tax resident and must report all worldwide income to the IRS. If the Green Card holder receives a gift from his or her nonresident alien parents, the Green Card holder may be required to file Form 3520 with the IRS.
Form 3520 is simply an information return and is due on the same date as your income tax return, with an extension offered until October 15. It must be filed separately from Form 1040. This form must be submitted only if the gift exceeds certain thresholds.
While foreign gift tax may not be due by the donee, a gift from a “foreign person” does need to be disclosed to the IRS if it exceeds certain thresholds.
Basically, the disclosure of your foreign gift or inheritance on the Form 3520 is required if you:
- Received more than $100,000 from a non-resident alien individual or a foreign estate (including foreign persons related to that non-resident alien individual or foreign estate) that you treated as gifts or bequests; or
- Received more than $16,111 for 2018 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
For example, consider a young man who is a U.S. citizen purchasing his first home. He receives gift money from his parents overseas totaling $40,000 to apply to the purchase of his new home. This money will not need to be reported AND no additional forms must be filed by the U.S. taxpayer. However, should he have received $120,000 as a foreign gift from his parents, then he would need to include the amount on Form 3520, but it would not be included as part of his gross income.
All Foreign Gifts Received For The Tax Year Must Be Aggregated
When calculating these threshold amounts, you must aggregate gifts from different foreign non-resident aliens and foreign estates if you know (or have reason to know) that those persons are related to each other or one is acting as a nominee or intermediary for the other.
For example, if you receive a gift of $75,000 from nonresident alien individual A and a gift of $40,000 from nonresident alien individual B, and you know that A and B are related, you must add the amounts and complete Form 3520 with the total of both gifts from alien individuals A and B.
Additionally, the IRS may consider gifts from foreign corporations and partnerships as disguised compensation and may re-characterize the gift as compensation that must be included in gross income. However, it is important to note that a gift to a U.S. person does not include any amount paid for qualified tuition or medical payments made on behalf of the U.S. person.
How To Prepare Form 3520
Whether you are self-preparing or have obtained the assistance of a certified tax professional, you must know certain details to completely prepare Form 3520.
On Part IV of Form 3520, the value of the gift from a non-U.S. citizen must be reported. If the gift wasn’t cash, it is imperative that the correct market or retail value of the foreign gift be included. In some cases, the taxpayer may find it helpful to seek the skills of an appraiser to guarantee the market value of the gift, especially if it is connected to real estate. The taxpayer should keep detailed records of the process by which the gift’s value was estimated.
Unlike Form 709, which is prepared and filed by foreign person who is actually giving the gift to the U.S. taxpayer, the responsibility to accurately file Form 3520 on time is the sole responsibility of the gift’s recipient.
In instances where the exact worth of a foreign gift cannot be ascertained, taxpayers must provide what is known as a “Beard” filing of Form 3520. This filing must:
- Contain a signature, under perjury and its associated penalties
- Be a purported return in its filing
- Be a reasonable and honest attempt to remain in absolute compliance with the IRS with any estimates provided
- Contain the required information so that the IRS can determine any tax liability
Once the Form 3520 has been filed, the statute of limitations (three years) under which the form can be audited, begins.
As Form 3520 can be complicated, especially if it is your first time including it as part of your filing process, it is best to seek the help of an experienced tax professional one who understands these laws.
Penalty For Failure To Report Foreign Gifts On Form 3520
In the case of a failure to report foreign gifts, a penalty equal to 5% of the amount of such foreign gifts applies for each month for which the failure to report continues (not to exceed a total of 25%). No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.
To demonstrate that you had reasonable cause for failing to file Form 3520, you must provide the IRS with:
- The reason for your failure to file
- A detailed list of ways in which you attempted to remain in compliance with tax law
- If applicable, evidence that you lacked knowledge of the applicable tax law
- If applicable, evidence that you relied on a tax professional or other expert who advised that Form 3520 did not need to be filed or could be filed later
How To Get Up-To-Date With Filing Form 3520
If you have failed to file a required Form 3520 on one or more occasions, you need to get in compliance as soon as possible. Do not wait for the IRS to contact you, as this could make you ineligible for programs or procedures that are designed to help taxpayers get in compliance with the IRS and tax laws. Instead, file Form 3520 as soon as you have gathered the required information.
Differences Between The Foreign Gift Tax Treatment Of Cash And Property
To complicate things even further, there are differences in the foreign gift tax treatment of cash and property. According to I.R.C. Section 2501(a); Reg §25.2501-1, a nonresident alien donor is subject to gift tax on transfers of real and tangible property situated in the United States. According to the IRS, if you are a nonresident alien who made a gift subject to foreign gift tax, you must file a gift tax return (Form 709) if:
- You gave any gifts of future interests,
- Your gifts of present interests to any donee other than your spouse total more than $13,000, or
- Your outright gifts to your spouse who is not a U.S. citizen total more than $136,000
The gifts are taxed at the same rates that apply to U.S. citizens.
As you can see, the foreign gift tax rules are extremely complex and vary with individual circumstances. Before proceeding, it is best to consult with your tax professional.
Get Expert U.S. Tax Preparation Wherever You Live
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on the taxation of US taxpayers living abroad. Our services include Foreign Gift Tax disclosures. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate Americans abroad on their tax responsibilities, so that they can stay in compliance.
The United States is known as a country filled with persons of different cultures and nationalities, making it one of the greatest melting pots for diversity on the planet. Therefore, it is extremely important for tax professionals to be up-to-date on all programs and procedures that can affect U.S. citizens living overseas (expats) or U.S. taxpayers who have received gifts from foreign relatives or other persons.
For further guidance on how to self-prepare your Form 3520, please see the Form 3520 Instructions.