Foreign Gift Taxes: What You Need to Report
As an American living abroad, you may wonder whether you will be taxed on any foreign gifts you receive. The short answer is no—but with an important caveat. While the US has no foreign gift tax, you must report any gifts you receive above certain thresholds. Failing to do so could result in sharp penalties.
Here’s what you need to know about foreign gifts to help you avoid those penalties and remain compliant with IRS policy.
Key Takeaways
- Foreign gift tax is a type of tax imposed on gifts made by US taxpayers who receive property from foreign persons above a certain threshold..
- Anyone who receives a gift or bequest worth more than $100,000 (as adjusted for inflation) from someone who isn’t a citizen or resident of the United States must file Form 3520 with the IRS by April 15th of the following year.
What Is a Foreign Gift?
A “foreign gift” refers to any asset or financial sum that you:
- Receive from a foreign person, and
- Treat it as a gift rather than including it in your gross income.
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As for a foreign person, that can refer to:
- Non-US citizens residing outside of the US
- Foreign corporations
- Foreign partnerships
- Foreign estates
- US domestic trusts that are treated as owned by a foreign person
For example, let’s say Mark moves from the US to Italy. While there, he marries Francesca. As a wedding present, Francesca’s parents gift the happy couple an amount equal to $50,000. Because this money came from non-US citizens residing in a foreign country, it would qualify as a foreign gift.
Inheritances bequeathed by foreign estates are another common example of foreign gifts.
Does the US Have a Foreign Gift Tax?
No, the US does not have a foreign gift tax, unlike the foreign inheritance tax. If you receive a gift from a foreign person, the gift is not subject to taxation. However, if the value of the gift exceeds certain thresholds, you must report it to the IRS. (It will remain non-taxable.)
The thresholds vary depending on the source of the gift.
- If you receive a gift from a foreign individual or foreign estate, you must report it if the total value of the gift exceeds $100,000 during a given tax year.
- If you receive a gift from a foreign corporation or partnership, you must report it if the total value of the gift exceeds $17,000 during the 2023 tax year (this amount is adjusted annually for inflation)
The IRS may choose not to recognize purported gifts from foreign corporations or partnerships as actual gifts, so be cautious when deciding what to characterize as a gift.
The IRS considers any gift of money or property made to you by a foreign person to be a taxable gift. This includes gifts from foreign corporations and foreign partnerships, as well as gifts from foreign individuals.
In both cases, this applies regardless of whether you receive the gift at a single time or multiple gifts from the same source spread out over the year. The “same source” rule also applies if you receive gifts from multiple foreign persons who are related.
For example, let’s go back to Mark and Francesca. They already received a gift of $50,000 from Francesca’s Italian parents. Now, let’s say Francesca’s uncle gives them a gift of $40,000, and her brother gives them $20,000.
Because these gifts all came from foreign persons who were related to one another, they count as a single source. And since the combined value of the three gifts adds up to more than $100,000, Mark would be required to report this foreign gift to the IRS.
In cases where you’ve received multiple gifts from the same source, you will typically need to identify each gift amount separately.
If a gift generates income, such as rental income, interest, dividends, or capital gains, that income is taxable, even though the gift is not.
Penalties for Failing to Report a Foreign Gift
The IRS may impose hefty penalties if you fail to report a foreign gift when required. The standard fine is 5% of the total value of all unreported gifts for each month you failed to report, up to a maximum penalty of 25%.
Of course, it’s always wise to comply with IRS regulations. But in this case, because there is no foreign gift tax when you report gifts as required, it’s all the more beneficial to follow the law. You have nothing to lose by complying—and plenty to lose if you don’t.
How to Report a Foreign Gift
If you’ve received a foreign gift, it’s important to know that you may need to report it on your taxes. To report a foreign gift, you must file IRS Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Here’s a step-by-step guide to help you through the process.
- Determine if you need to file Form 3520– If you received a foreign gift worth more than $100,000 or received gifts from a foreign individual or entity totaling more than $100,000 in a single tax year, you will need to file Form 3520.
- Gather the necessary information to complete Form 3520– you will need to provide information about the gift, such as its value, the name and address of the donor, and the date the gift was received.
- File Form 3520 by the deadline – April 15th, 2024 for the 2023 tax year. Late filing can result in penalties, so filing on time is important.
- Seek professional assistance- Form 3520 is a complex form, and it’s important to file it correctly to avoid penalties. Consider working with a professional tax preparer like Greenback, who is experienced in handling foreign gifts, to ensure that you meet all reporting requirements.
For more information, see the instructions for Form 3520 on the IRS website.
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We hope this guide has helped you understand the tax requirements for foreign gifts. Contact us, and one of our customer champions will be happy to help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
