In order for a foreigner to avoid the U.S. gift tax for gifts made to a U.S. citizen or resident alien, the gratuitous transfer of the asset must be real, legal, or implied, made by a foreign resident individual, estate, or trust, outside of the geographical limits of the United States while the gifted asset is also located outside its borders. Typically, if a foreigner gifts money or property — except intangibles such as securities — to anyone in the world, and the transfer originates or is completed, or the gifted property is located, in the U.S., the foreign transferor must pay a gift tax if the value of the gift exceeds $15,000 per beneficiary in calendar year 2019.
What This Looks Like in Practice
It is quite common that parents or family members living outside the U.S., as well as their estates, make gifts of money and other property to their U.S. citizen or resident-alien children or relatives. When such transfers of money happen or originate from the parent’s bank account in the U.S., such transfer is subject to tax if it exceeds the $15,000 threshold, per beneficiary, per year. If the transfer originates abroad, however, and concludes or is completed by a deposit into the recipient’s U.S. bank account, then the gift may avoid the U.S. gift tax.
Now, we say may because there hasn’t been a court decision on the subject, and the IRS refuses to issue any private letter rulings or offer guidance on the subject matter. The fact is, there are thousands if not millions of electronic transactions or deposits being made every year from abroad into U.S. bank accounts belonging to U.S. citizens and resident-aliens and there has not been any indication that such transfers are being subjected to gift taxes.
Avoiding a Possible Gift Tax
Notwithstanding the preceding, however, given how the law is written, not how it has been applied de facto, we would rather be safe than sorry, and recommend that any gifts, especially of money, being made by foreigners to U.S. persons should be made and completed outside of the United States. For instance, foreign-resident parents may gift any amount to their U.S. child and deposit it into an account held in a foreign bank in their child’s name. Once the money has been transferred into that account, the child owns the money and he can then transfer the money directly into his U.S. account without the risk of any gift tax.
Now, even though these transfers by the foreign-resident donors are not generally subject to tax, the beneficiaries or donees of such gifts in the U.S. must comply with different filing and informational obligations to avoid the risk of being fined or receiving other economic sanctions.
Declaring Foreign Gifts to the IRS
Therefore, a U.S. citizen or resident-alien (including those foreigners with or without a visa of any kind, even those who are not subject to the income tax by having exercised a “closer connection” exception under the law or under a tax treaty) must file an annual return called “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” by April 15 of the year following the year they received any and all gifts that exceed $100,000 from foreign individuals, estates, and trusts. That is, you must declare all the gifts received in one year that together exceed $100,000.
This return must be filed regardless of who has made the free transfer. Therefore, it is not limited to those gifts received from foreign family members, individuals, estates, or trusts. For a gift made by a foreign entity (corporation or partnership), the minimum threshold to file the return is reduced to $16,076 for gifts received in 2018. This amount is annually indexed to inflation.
When free transfers are originated from foreign entities or trusts, there is also the obligation by the beneficiary or donee who receives the gift to pay income tax. These payments must be made when filing form 3520 mentioned above.
Lastly, the penalties incurred for not filing on time, or for filing an incomplete or incorrect form 3520, shall be a fine of at least $10,000 or 5% of the gifted value up to 25%, whichever is higher, for each month after the date in which the form had to be filed. For transfers originating from foreign trusts, the initial fine is $10,000 or 35% of the gifted value, whichever is higher.