Gift From a Foreign Person (Is a Gift From a Foreign Person Taxable)
Gift From a Foreign Person – Is a Gift From a Foreign Person Taxable? Golding & Golding represents clients worldwide in over 70-countries. We receive many questions about whether a gift from a foreign person is taxable, and how does the U.S. & IRS treat a gift from a foreign person for reporting and tax purposes.
Gift From a Foreign Person
Notwithstanding more complex issues, such as the annual gift exclusion and U.S. situs, there are generally two aspects to this analysis:
- U.S. Tax Treatment of the Gift; and
- IRS Reporting Requirements of the Foreign Gift
The reporting aspect is relatively straightforward. When a U.S. Person receives a gift from a foreign person, the U.S. Person:
- Reports the Gift (if the thresholds are met)
- Does not pay tax on the receipt of the gift
- Pays Tax on income generated from the gift.
Gift Reporting on Form 3520
If a foreign person was to gift a U.S. person $250,000 equivalent of non-U.S. property, the U.S. person’s reporting requirement would be limited to filing a Form 3520 (absent other facts). And, the United States has no reach over the foreign person who issued the foreign gift.
Because as foreign persons who are not otherwise subject to US tax or US tax laws (aka no U.S. property owned), the Internal Revenue Service and government as a whole have no right to enforce U.S. gift and estate tax “rules” against them.
Is a Gift From a Foreign Person Taxable?
Generally, there is no estate tax with a foreign person (residing outside the U.S.) unless U.S. Situs is involved. If the donor resides in the U.S., or is gifting U.S. Property — the rules may vary.
Tax on Gift From Foreign Person Example 1: No Income
Michelle is a U.S. person. Her Parents are Taiwanese. Michelle graduated graduate school and her parents transferred her $800,00 to buy a house. The gift is not taxable (reported on Form 3520)
David’s parents are citizens of China. They are non-US persons and neither of them have ever had any US citizenship, Legal Permanent Resident status or otherwise filed a US tax return (or subject to US tax). David’s parents gifted him $1 million to purchase a home for him and his new wife.
Unless other facts impacted the scenario, David’s parents would be considered foreign persons and David’s reporting would be limited to filing a Form 3520.
Example 2: Neil From India Example 2: Income Included
Neil came to the United States to study on F-1 visa and then transitioned over to an H1B visa. Neil’s parents were very proud of him, so they gifted him $100,000 worth of fixed deposits (FDs).
The fixed deposits are under Neil’s name even though his parents are responsible for depositing withdrawn the money from different institutions — both to get the best tax rate, as well as to reduce any immediate taxation under Indian tax law.
Gift Reporting on IRS Form 3520
A Form 3520 is filed in three types of situations:
The most common situation is when a person receives a gift from a foreign person in which the value of the gift exceeds $100,000 in a year. It is important to note that it does not matter whether it was one transaction, or a series of transactions from the same person (Read: transfers from Taiwan split amongst 20 different people to circumvent currency restrictions). If a person receives more than $100,000 in a gift from a foreign person (even if the person is using conduits), then he or she will have to file a form 3520.
The second common situation is when a person receives a gift from a foreign business. If the amount of the gift from the foreign business exceeds $15,671 in any given tax year, then the same form must be filed.
The third, situation involves trust reporting. It should be noted that the IRS is not a huge fan of foreign trusts for many different reasons. Most notably, as a true foreign trust, the IRS does not have much stronghold over the trust itself. In order to amplify the reporting rules, the Internal Revenue Service requires the recipient of any amount of a trust distribution to be reported on form 3520.
Penalties for non-filing of Form 3520
The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
Schedule a Foreign Gift Reduced-Fee Consultation
We have handled more than 1000 disclosures, and have spoken with thousands more people regarding reporting foreign assets, accounts, investments and income to the IRS (OVDP, Traditional Voluntary Disclosure, Streamlined and Reasonable Cause).
Scheduling a reduced-fee consultation with our team is a highly-effective way for you to determine what your potential liability, strengths, and weaknesses will be when you decide to move forward with a streamlined disclosure to the IRS.
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Need a Second Opinion on Receiving a Foreign Gift?
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)