Do I have to pay taxes on gifts from overseas family? 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.
I know a lot of foreign-born families send money overseas to their families. The next post will address this issue.
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 come 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 the 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
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 Overseas Gifts
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 15th day of the 4th month 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 own considerations to keep in mind.
In both cases, there could be local (home country) tax implications, so it’s best for John’s dad to reach out to a local tax authority 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 John’s 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.
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’s intention was 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 anything for the privilege of receiving gifts from overseas families, and as long as you do things right, you’ll most likely come out ahead.
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