ELITE ADVISOR BEST PRACTICES
Make Sure Clients Are Compliant When Receiving Overseas Gifts
Gifts and inheritance from abroad are not always taxed the same (first in a series)
By Deepa Venkatraghvan
- Gifts in the United States are taxed in the hands of the donor and not the receiver.
- When a U.S. taxpayer receives gifts from a non-U.S. taxpayer, there might be certain reporting requirements.
Who doesn’t like to get gifts—especially when gifts in the United States are taxed in the hands of the donor and not the receiver? But if your clients do receive gifts from someone living abroad, they should be ready for some serious reporting, even when there is no apparent tax impact.
Gift tax rules
In the United States, the federal tax on gifts is levied in the hands of the donor, or the person making the gift. Gifts made by a U.S. taxpayer are taxable in excess of the annual limit of $13,000 per gift (per receiver). There are some exemptions, such as gifts to a spouse, educational and medical exclusions, and amounts paid to political organizations, etc.
Moreover, the gift tax applies only when the person making the gift is a U.S. taxpayer—that is, a U.S. resident, green card holder or citizen. When a gift is made by a person residing outside the United States and that person is not a U.S. taxpayer, no gift tax is required to be paid by the donor. However, in such cases, if the person receiving the gift is a U.S. taxpayer, then he or she must complete Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.
Points to remember
Here are some important things you should bring to your clients’ notice if they receive gifts from abroad:
- Even if there is no tax liability at the time of receiving the gift, U.S. residents, citizens and green card holders who receive gifts of more than $100,000 from someone overseas must file Form 3520 along with their tax returns. This applies to financial assets such as cash and investments as well as physical assets like property. When the gift is in the form of property, the recipient must disclose on Form 3520 the fair market value of the property on the date of the gift.
- Filing is mandatory in order to avoid penalties for noncompliance. The requirement of submission is in line with the regular tax return due date or extended date.
- Gifts of foreign financial assets exceeding a certain limit may also trigger additional reporting in the form of Form 8938 and Form TD F 90-22.1. U.S. taxpayers must be aware of these requirements.
Gift vs. inheritance: Tax planning
The tax rules in the United States make a very important distinction between property received as inheritance and property received as a gift.
When property (including real estate, shares and securities, etc.) is received through inheritance, the basis or cost to the receiver is assumed to be the fair market value of that property on the date the donor died. But in case of property received as a gift, the basis or cost to the receiver is taken to be the original basis of the donor.
This distinction becomes important at the time the property is sold by the receiver. In order to calculate capital gains tax, the basis would be different in each case. Because of this difference, U.S. taxpayers must often weigh both options—receiving high-value property as a gift and receiving it through inheritance. For instance, in cases where the donor is of advanced age, it might be better to allow the property to be received as an inheritance so the receiver will get the benefit of a higher basis. Of course, this must be evaluated on a case-by-case basis.
If the amount of the gift is less than $100,000, no Form 3520 is required. However, experts suggest that in some cases it is advisable to file Form 3520 anyway if the amount of the gift is less than $100,000. That way there is documentation of the transaction to avoid IRS questions in later years. After all, with the IRS, it is always better to be safe than sorry.