UPDATED May 22nd 2020

Overview

This article will cover the necessary facts a US expat living in the US should know about US gift tax. Figures stated are based off of the 2020 tax year.

US gift tax is one of the most commonly mis understood US tax laws. The rules that surround gift tax can be complex and vary based on the taxpayers circumstance.

A gift tax is a tax on the transfer of assets. A classic example of gifting is money, investments or property to a child or grandchild. The donor, in this case parent or grandparent, is generally responsible for paying the fit tax.

Transactions that happen from one US citizen to another can be subject to gift tax. Whether you are a US citizen living abroad or a US citizen living in the US the same gift tax laws apply.

What types of gifts are taxable?

The majority of gifted items will be taxable. However, there are some criteria that will make a gift exempt:

• If the gift value has not exceeded the annual exclusion. For 2020 the annual exclusion is $15,000. The value of a gift is judged on the ‘Fair Market Value’.

• Gifts between spouses. If one spouse is not a US citizen or resident this exemption is not valid.

• Gifts to political organisations

• Gifts to pay for tuition or medical expenses for someone.

Can gift value be deducted on an income tax return?

Generally speaking, making a gift or leaving an estate to heirs will not affect the donor federal income tax. The IRS does not allow the value of a gift to be deducted from taxable income.

Estate and gift tax limit

The Internal Revenue Service announced today the official estate and gift tax limits for 2020: The estate and gift tax exemption is $11.58 million per individual, up from $11.4 million in 2019. That means an individual can leave $11.58 million to heirs and pay no federal estate or gift tax, while a married couple will be able to shield $23.16 million.

FORM 3520

A form 3520 should be used to report certain foreign trusts, gifts and bequests transactions. As a US expat sending a gift it is likely that filing a form 3520 will be required. Below are situations when an American Expat may be required to file a Form 3520:

• A foreign trust is created by a US person

  1. Property or money is transferred to a foreign trust by a US person, including:

     • Transfers by reason of death

     • Transfers applicable to foreign grantor who later becomes a US person (Sec 679(a)(4)

     • Transfers by US citizens/US residents to trusts which were not initially foreign trusts, but subsequently become foreign trusts while the individual is alive (Sec 679(a)(5)

  2. The US expat transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation.

  3. The US expat person is regarded as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679.

  4. The US expat received a distribution from a foreign trust during the current tax year.

  5. The US expat is the person who, during the current tax year, received either:

     • More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or

     • More than $16,388 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

Gifts or Bequests from Expats

U.S. citizens and residents that receive suited gifts or bequests from covered expatriates under the IRC 877A may be subject to tax under the new IRC section 2801, which states that there is a transfer tax on U.S. persons who receive gifts or bequests on or after June 17, 2008, from such former U.S. citizens or former U.S. lawful permanent residents.

Penalties for Failure to File Form 3520

You may be penalised if you do not file your Form 3520 on time or if it is incomplete or inaccurate. See the Instructions for Form 3520 for more details on penalties that may be imposed for not timely filing the Form 3520, or if the information is incomplete or incorrect, for failure to report foreign gifts, and/or for undisclosed foreign financial asset understatements

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