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-US citizen, are there any tax implications?
Gifting to non-citizens is very common when a foreign national living in the US still have family members living abroad. Gifts may occur in both directions and inheritances from overseas may be received here in the US.
Under the US estate and gift tax rules, US persons are allowed an annual exclusion from gift tax on gifts up to $15,000 (in 2021) or $30,000 including the spouse, to any individual whether or not they are US 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 $11,580,00 (in 2021).
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. There is also what is called the ‘super annual exclusion’ for gifts to non-citizen spouses of $159,000 (in 2021) 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 (in 2021) 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. Gifts of more than $16,815 (In 2021) from foreign corporations or foreign partnerships must also be reported.
Please keep in mind there are complex rules that apply to US estates making distributions to non-US citizens. Likewise, 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!