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New IRS Regs Cover Tax on Gifts and Bequests From Expatriates

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Sep 15th 2015
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Normally, the gift tax only applies to the person giving away the gift, not the person receiving it. But a special tax law provision imposes tax on certain gifts and bequests received by taxpayers from expatriates who left the United States on or after June 17, 2008. Now, the IRS has issued new proposed regulations governing taxation of these items.

Section 2801 of the Internal Revenue Code, which was added by the Heroes Earnings Assistance and Relief Tax Act of 2008, requires tax to be paid at the highest gift or estate tax rate on covered gifts or bequests of covered expatriates, regardless of whether the property was acquired before or after the taxpayer moved abroad. However, a reduction in the resulting gift tax is allowed in the amount of the annual gift tax exclusion ($14,000 per donee in 2015).

The new proposed regulations include certain critical definitions for Section 2801 purposes. A “covered gift” is defined the same way as other gifts subject to gift tax under the tax code. But a “covered bequest” is defined as property that would have generally been included in the expatriate’s estate if he or she was a US citizen or resident.

In addition, a “covered expatriate” is defined as someone who: has an average annual net income tax liability greater than $124,000 adjusted for inflation ($160,000 for 2015) for the previous five tax years, has a net worth of $2 million or more, or has failed to certify under penalty of perjury that he or she has complied with all US tax obligations for the five preceding taxable years.

Note that the new regulations include several key exceptions to these definitions. Most notably, there is an exception for taxable gifts reported on a covered expatriate’s gift tax or estate tax return as long as the tax is paid in a timely fashion. Other exceptions include:

  • Qualified disclaimers of property made by a covered expatriate.
  • Charitable donations that would qualify for the estate or gift tax charitable deduction.
  • Gifts or bequests to a covered expatriate’s US citizen spouse if he or she would qualify for the gift or estate tax marital deduction.

However, this last exception will be forfeited if the transfer is made to a nonelecting foreign trust that makes a distribution to the citizen spouse. A nonelecting foreign trust is defined as a foreign trust that hasn’t elected to be treated as a domestic trust for US tax purposes.

To calculate the tax owed by the recipient, the value of covered gifts and estate is reduced by the available gift tax exclusion. The property’s value is determined on the date it is received. Then you multiply the net amount by the highest gift or estate tax rate.

Be aware that other special rules may apply. For instance, the proposed regulations also cover situations where the tax is imposed on a trust for purposes of the generation-skipping transfer tax or in the case of a charitable remainder trust.

The IRS intends to issue Form 708, US Return of Gifts or Bequests from Covered Expatriates, once these proposed regulations are finalized. It will then provide the due date for filing Form 708 and other rules governing the Section 2801 tax liability in the final regulations.

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