Gifting can be a great way to move appreciated assets out of your estate, transfer income to lower taxed family members or just to be plain nice! What about gifting to a non-U.S. citizen — are there any tax implications?
Gifting to non-citizens is very common when a foreign national living in the U.S. still have family members living abroad. Gifts may occur in both directions and inheritances from overseas may be received here in the U.S.
Under the U.S. estate and gift tax rules, U.S. persons are allowed an annual exclusion from gift tax on gifts up to $14,000 (in 2016) or $28,000 including the spouse, to any individual whether or not they are U.S. citizens. This is a per individual limitation meaning you can gift that amount to as many people as you wish. Gifting above that amount will reduce your lifetime annual exclusion which is currently $5,450,000 (in 2016).
While there may be no tax on the gifts, in some cases it may make sense to file a Form 709, ‘United States Gift (and Generation-Skipping Transfer) Tax Return’ to document the gift. This is especially true when gifting to a non- citizen spouse. Why gift to a spouse? In short, non-citizen spouses do not receive an unlimited marital deduction for assets received on the death of their spouse. Those assets received could be subject to the estate tax. This can be avoided by transferring assets to your spouse during lifetime. By the way, there is what’s called the ‘super annual exclusion’ for gifts to non-citizen spouses of $148,000 and the proof that these gifts were made would be the annual Forms 709.
What if you receive a gift or inheritance from a non-citizen?
If you receive cash or other property from a non-citizen individual and the amount exceeds $100,000 it must be reported on a Form 3520, ‘Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts’. This is an informational return only and no tax will be due, however, the penalties for not filing the form are severe.
Please keep in mind that these rules do not apply to U.S. estates making distributions to non-U.S. citizens. In this case, estate tax will most likely apply and thorough pre-death planning should be done to mitigate taxes. In addition, gifts to and from foreign business entities follow a different set of rules and is way beyond the scope of this blog.
In the meantime, don’t let these complications dampen your generous spirit, go ahead and gift away, just know the rules!