The U.S. gift tax rules apply to gratuitous transfers by a U.S. person or foreign person domiciled in he United States, regardless of the location of the recipient on the money or property transferred. Gifts by a foreign person not domiciled in the United States are subject to U.S. gift tax rules only if the money or property is transferred to a U.S. person.
GIFTS FROM U.S. PERSON
A U.S. person who gives gifts of money or other property to another U.S. person may be required to file Form 709, United States Gift Tax Return. Form 709 is required to be filed by a U.S. person if any of the following apply:
- You gave gifts to at least one person (other than your spouse) that amount to more than the annual exclusion for the year.
- You and your spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion.
- You gave someone (other than your spouse) a gift of a future interest that they can’t actually possess or enjoy, or from which they’ll receive income later.
- You gave your spouse an interest in property that will terminate due to a future event.
Generally, any gift is a taxable gift. However, there are exceptions to this rule. The following are nontaxable gifts:
- Gifts that do not exceed the annual exclusion (currently $14,000) for the calendar year.
- Tuition or medical expenses paid directly to a medical or educational institution.
- Gifts to your spouse (for federal tax purposes, the term “spouse” includes individuals of the same sex who are lawfully married).
- Gifts to a political organization for its use.
- Gifts to charities.
The donor is responsible for paying the gift tax. However, if the donor does not pay the tax, the person receiving the gift may be responsible.
Form 709 is separately filed from personal income tax returns. The due date for filing Form 709 is the same as the due date for filing a personal income tax return, including extensions. Form 709 must be filed annually for all reportable gifts given during the taxable year. A penalty generally applies if Form 709 is not timely filed or if the information is incomplete or incorrect.
GIFTS FROM FOREIGN PERSON
A U.S. person who receives foreign gifts of money or property may need to report these gifts on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax. However, there are significant penalties for failure to file Form 3520 when it is required.
A foreign gift is money or other property received by a U.S. person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income. A “foreign person” is a nonresident alien individual or foreign corporation, partnership or estate.
The IRS may seek to re-characterize purported gifts from foreign partnerships or foreign corporations as items of income that must be included in gross income. Additionally, gifts from foreign trusts are subject to different rules than gifts from other foreign persons. A gift to a U.S. person does not include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person.
Form 3520 must be filed if the receipt of money or other property above certain amounts is treated as a foreign gift or request. The following must be included:
- Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate), or
- Gifts valued at more than $15,358 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).
Gifts received from related parties must be combined. For example, if you receive $60,000 from nonresident alien A and $50,000 from nonresident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000.
Form 3520 is separately filed from personal income tax returns. The due date for filing Form 3520 is the same as the due date for filing a personal income tax return, including extensions. Form 3520 must be filed annually for all reportable foreign gifts and bequests received during the taxable year.
A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect.