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US Gift Tax: How Changes to Expatriate Gift Taxation Might Impact You

US Gift Tax: How Changes to Expatriate Gift Taxation Might Impact You

Are you trying to understand the US gift tax and how it affects you if you relinquish the U.S. citizenship?

The gift tax in the United States is one of the most commonly misunderstood taxes in US tax law.  The rules surrounding the gift tax are complex and quite often difficult to understand.  Historically, it’s been the giver that is liable for the tax, but the IRS has proposed new gift tax regulations which will alter the manner in which the tax is assessed for US Citizens/green card holder receiving a gift from another US citizen or green card holder who relinquish their citizenship/renounce the green card.  If you are a US person considering expatriation and you are considering sending a valuable gift to another U.S. individual, these new regulations may impact your decisions on the amount of the gift and how your will is going to be written up.

A Congressional act that would affect US Citizens who receive gifts or bequests from a covered expatriate was passed in 2008 on June 17.

The Heroes Earnings Assistance and Relief Tax Act of 2008 primarily focused on benefits extended to military members and their families.  There was once provision, however, that affects covered expatriates and the gifts they offer to friends and family that live in the United States.  Even though this has been passed by Congress since back in 2008, the IRS has still not completed forms and instructions required to report the gift and pay taxes.  Until the IRS completes this task, the tax can’t go into effect.  As such, this is the perfect time to take action.  Arming yourself with the facts will help to ensure you can minimize the negative impact this provision has on you and those to whom you send gifts.

If you have formally expatriated from the United States and meet certain conditions, you may be considered a covered expatriate; therefore, the recipient(s) of your gift(s) may be taxed.

Per the provision, the IRS is allowed to collect taxes from any US Person who received a covered gift or bequest from a covered expatriate who expatriated from the United States on the date of June 17, 2008, or beyond.  The term ‘expatriate’ refers to anybody who has renounced their US Citizenship or Permanent Resident status.  In order to become an expatriate, you must get clearance from the IRS and file with the US Department of State.

Not all expatriates are regarded by the IRS as ‘covered expatriates’.  If you have renounced your US Citizenship and any of the following applies, you are considered a covered expatriate:

  • For the five year period preceding your expatriation, you had an average annual net income tax liability of at least:
    • $147,000 for 2011
    • $151,000 for 2012
    • $155,000 for 2013
    • $157,000 for 2014
    • $160,000 for 2015 or
  • Your total net worth was at least $2M at the time you expatriated, or
  • You failed to prove that you had satisfied all of your US tax obligations during the five year period preceding your expatriation date.

If you were deemed a covered expatriate when you renounced your US Citizenship, you would have been taxed on your total net worth.  The IRS would have assumed you sold all of your assets, and you would have been taxed on the supposed income.

As a covered expatriate, your loved ones will be affected by taxation on any gifts or bequests they receive from you.

If you have determined that you are – in fact – a covered expatriate, you will not have any tax liability on gifts or bequests you offer, but any friend or family member who receives these from you will be taxed.  The recipient is required to claim the gift or bequest by filing a specific form with the IRS.  All of the gifts or bequests a US Person receives from you in a calendar year are added together.  From the total amount of the gifts/bequests, the US Person on the receiving end will be able to deduct up to $14K from taxation.  Whatever’s left will be taxed at the highest gift tax rate of 40%.  All this will be calculated on the new Form 708 once the finalized regulations are published by the IRS.

Another fact worth noting is:  The value of a covered gift is assigned based on its fair market value on the date the gift is given.  The value of a covered bequest is determined by assessing the fair market value on the date distributed by the deceased’s estate.

There are a couple exceptions to the aforementioned rules.

If the gift was received by a charity that is qualified by the IRS, there will be no gift taxes due.  Also, if the gift is given to the US Spouse of the covered expatriate, the recipient will be able to claim the unlimited marital deduction.  This does not apply to any gift or bequest which is given to the spouse via a foreign trust which has not made the election to become a US trust.

The date that the forms will be ready and all these rules go into effect is still to be determined.

It is not known how long it will take the IRS to complete the required forms and instructions or if the gift tax will be retroactively assessed.  You can use this information, though, to decide how to plan future gifts or revise your will to disperse your estate differently.  Taking time to plan out your gifts or bequests will help to ensure that the recipient doesn’t wind up paying too much tax.

Ines Zemelman, EA
Founder of TFX