The post was originally published on Oct 19, 2011. It was updated on June 16, 2014, with information relevant to the 2013 and 2014 tax years.
A gift tax is a tax on the transfer of assets when no or only nominal value is expected in return. This is no different on your US expat taxes. The classic example is the gifting of money, investments or other property to one’s children or grandchildren. In the words of the IRS, “If you are a US citizen or resident alien, the rules for filing income, estate, and gift tax returns and for paying estimated tax are generally the same whether you are in the United States or abroad.”
Furthermore, note that in a transfer from one US citizen to another, it is irrelevant where the two parties to the gift reside (whether in Bombay or Boston), and it is irrelevant where the property is located (for example, your uncle’s chateau in France); the rules are the same for your US expat taxes as if it were a domestic transaction.
Gifts Excluded on Your US Expat Taxes
While most items are potentially taxable gifts, certain exemptions are granted on US expat taxes. Note that these are the same for US expat taxes and taxes for those citizens who live inside the US. The exclusions include:
- Gifts of a value not exceeding the annual exclusion, currently at $14,000 (as of 2013)
- Gifts between spouses (but see the exception below if one spouse is not a US citizen or resident)
- Gifts to a political organization
- Gifts used to pay for the tuition or medical expenses of someone
As of 2011, the annual exclusion is $14,000 by the donor (giver) to any individual donee (receiver). In other words, I could give $14,000 gifts to as many different people as I wanted without generating any changes on my US expat taxes. That being said, if I were to donate to any one of those persons $14,001, then I would have a taxable event and a return would need to be filed.
My spouse could also donate $14,000 to as many people as he or she wanted without gift tax complications, even if he or she donated to the exact same people that I did. Now let’s imagine my spouse and I are rich and that our son is married with two children. My spouse and I could potentially gift as much as $112,000 ($14,000 from me and an additional $14,000 from my spouse to each of the four individuals in my son’s family) without the need for a gift tax return, provided that we structured the gift correctly. Structuring who gives your gifts is very important for your US expat taxes.
Exceeding the Exclusion on your US Expat Taxes
Sometimes, you receive or give more than $14,000 in a year for a purpose not excluded as noted above. What happens then? Well, the gift tax is actually a tax on the donor, not the donee. In this case, the donor must file Form 709 with the IRS, disclosing the gift. The good news is, more likely than not, no gift tax will be due, at least in the current year. As of right now, each donor gets a lifetime unified credit equal to the estate tax on $5,000,000.
Let’s go back to my example above and say that I decide that I don’t want to give my daughter-in-law or my grandkids a dime and instead give everything to my son. My gift is now 3*14,000 = $42,000, all to Junior. He’s happy and has nothing more to do, but I will have to report the amount above $14,000, $42,000, on a Form 709 with my US expat taxes. I have the option of paying the tax, $42,000 * 35% = $14,700, or of deducting that amount from my unified credit. Since I’m pretty confident that I won’t be leaving an estate in excess of 5 million, I decide to deduct the $14,700 from my unified credit, leaving me with a unified credit of $1,734,300 ($5 million * 35% = $1,750,000 – $14,700).
Leaving the Family Jewels
When the gift given is not cash, the process becomes more complicated. The appropriate amount of the gift is fair market value, which will be the amount the donor records of the gift for the purpose of filing Form 709 (if the gift is greater than the exclusion amount). If fair market value is easily determined, as for publicly traded stock, then there really isn’t an issue. However, let’s decide that my spouse really wants to see more of our grandchildren and so gifts my son a vacation home that has been in her family for generations so that they can visit and spend time with us. In this case, we would want an appraisal to support the fair market value of the gift.
Donee’s Basis in the Gift
Usually, the donee inherits the donor’s basis and holding period for a non-cash gift. Let’s take the example above in which my spouse gives Junior the vacation home. Although we report the gift at fair market value, Junior gets my spouse’s basis in the house. For example, if my spouse inherited it from ancestors, my son’s basis will most likely be substantially less than the fair market value of the home. This is significant because if he were to sell the house in the future, he would have long-term capital gains tax due on the difference between his basis in the house and what he sold the house for.
International Considerations: Gifts to Non-US Citizens
Let’s say I go to the mailbox this afternoon and I find a check for $500,000 from my great aunt Sophie in the UK. Now, if my great aunt is not a US citizen and is not currently a legal resident, then both of us are home free, there is no tax due for her and I’m good because the gift tax is a tax on the donor, not the donee. This would go unreported on my US expat taxes.
Now, let’s change the scenario. Let’s say that she sends the keys (and deed) to her Aspen vacation home, with a nice (if illegible) note that she doesn’t feel like she can ski anymore, she’s ninety, and therefore would like to pass it on to other members of the family. In this case, I will not need to report anything, but my great aunt will most likely owe US expat taxes on the gift since the property is located in the US.
In certain circumstances as the donee, I might need to file Form 3520 with my US expat taxes to disclose my receipt of a gift from an overseas source. Note that this form does not mean that you are going to need to pay taxes. The thresholds for filing are currently:
- A gift in excess of $100,000 in property or cash received from a nonresident alien individual (in this example, Aunt Sophie)
- A gift in excess of $13,258 from a foreign corporation or foreign partnership.
Spouse is Not a US Citizen – How Does this Affect my US Expat Taxes?
One of the biggest trip-ups that might affect many expatriate Americans is when their spouse is not a US citizen or resident. When both spouses are US citizens or US residents, not only can they combine their gifts to maximize the advantages of the exclusion (as in my example when my spouse and I gift to my son and his family above), but a spouse can gift to their US citizen spouse any or all of their estate without incurring taxes.
Now, if one of the spouses is not a citizen or permanent resident, the dynamic changes. In this case, the gift is limited. Keep in mind that the gift tax works hand in hand with the inheritance tax, and this can have serious consequences for someone with a non-resident alien spouse. As of right now, the tax is 45% on transfers in excess of $5 million. However, the inheritance tax is very politically charged and has bounced around from basically non-existent to $1 million, then again to $5 million. If you have anything near $1 million in assets, then it may be time to consult your tax planner and get on top of this situation.
Usually, what trips taxpayers up with the gift tax is compliance. They often make the gift without knowing the rules, and it can come back to bite them. Under the current rules (with the $5,000,000 estate rules in place), most of us will not have to worry about actually having to report gifts on our US expat taxes. The key is understanding when you need to file and structuring your gifts to ensure a tax advantage of the exemptions, or complying with the filing requirements if your gift is not exempt.
Questions About US Expat Taxes?
We are more than happy to help you with any of your concerns about your US expat taxes. A good place to start is our post on reporting transactions with foreign trusts. If you need help preparing for your gift or estate taxes, or if you would like to learn about our expat tax services, please contact us.