TAX TIME: Reporting Foreign Gifts & Inheritances

by Joel Friend, joel@joelfriend.com

Frequently, taxpayers think that gifts of cash, securities or other assets they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks income tax must be paid on the gifts received. To fully understand the ramifications of gifting, and more specifically to gifts received by foreign persons, the following should be brought to light.

Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances and limit the estate’s amount of inheritance tax. Because giving away one’s assets before dying reduces the individual’s gross estate, governments have placed regulations on gifting and estate taxation. Since a foreign person is NOT subject to U.S. estate tax, the rules and regulations associated with a foreign’ s transfer of wealth is governed not by the U.S. but rather by the donor’s taxing authority. Yet, all gifts made to by a foreigner (Parent) to a U.S. person (Child) are 100% tax-free to the recipient (Child).

Foreign Gifts:

While a U.S. person can receive an unlimited amount of tax-free gifts, all gifts of more than $100,000 from a non-resident alien individual or foreign estate and gifts of more than $15,671 (in 2016) from foreign corporations or partnerships must be reported upon IRS Form 3520. IRS Form 3520 is due at the same time as an individual’s income tax return (Form 1040), including extension. The penalty for failure to timely report a gift or inheritance from a foreign person is equal to 5% of the value received per month, up to a maximum 25% penalty. The penalty associated with foreign trusts is up to 35% of the value of the trust property received.

If you are expecting a gift or inheritance from a foreign person, here are some planning considerations to pay close attention to:

  • Avoid gifts from foreign partnerships and corporations. Since it is viewed that partnerships and corporation usually do not make gifts, the IRS has the ability to change the character from a tax-free event (Gift) to taxable income for the recipient. Whenever possible, gifts should be made from a foreign individual directly.
  • It is better to have the foreign donor (i.e. Parent) gift monies in excess of the annual exclusion amount ($14,000) outside of the United States directly to a foreign account owned by a U.S. person (i.e. Child). Using transfers between foreign financial institutions mitigates any argument which the IRS could impose as to the taxability of the monies.       The U.S. person upon receipt of gift monies in their foreign account can subsequently transfer the funds to their U.S. bank account.
  • Direct gifts of U.S. real estate by a foreign person should be avoided. The direct gifting of U.S. real property by a foreign person will result in a taxable event if the value of the real estate exceeds $14,000.       The foreign donor will be liable to pay gift tax of 40% upon the value the real estate exceeds $14,000.       This is easily voided if an entity owns the real estate since the gifting of shares/membership units is not taxable.

If you have questions regarding this reporting requirement or need assistance with the filing of any corporate and/or individual federal or state tax declaration please do not hesitate to contact our office:

Joel Friend Joel Friend & Associates Phone: (954) 704-1040 | Fax: (954) 659-8803 E-mail: joel@joelfriend.com | Website: www.JoelFriend.com Address: 2863 Executive Park Drive., Suite 105. Weston, Florida 33331

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