Few people realize that in a strict sense, all gifts are potentially subject to gift tax by the IRS. Various provisions of gift-tax law prevent most people from ever having to deal with gift tax, but it can still come into play. In particular, when gifts are made between U.S. citizens and foreign citizens, some special rules can come into play. Let's look at the various issues you'll need to consider with both types of foreign cash gifts.
Making cash gifts to foreign citizens
Gifts to foreign citizens are subject to the same rules governing any gift that a U.S. citizen makes. If a gift exceeds the annual exclusion amount, which is currently $14,000, then you must typically file a gift tax return to report the excess. Often, you won't owe any actual tax, because a lifetime exemption applies above and beyond the annual exclusion amount. Currently, that lifetime exemption is $5.45 million, so it takes a huge amount to generate actual gift tax liability.
The one big difference in treatment of foreign gifts involves making a gift to a spouse who isn't a U.S. citizen. Most gifts to spouses are eligible for an unlimited marital deduction, but non-citizen spouses are subject to an annual limit of $148,000 in 2016. Gifts above that amount can trigger the need to file a gift tax return and use lifetime exemption in the same way that gifts to non-spouses that are above the respective annual exclusion amounts do.
If you make gifts in foreign currency, then the exchange rate at the time you make the gift is what you need to use to determine its U.S. dollar value for gift tax purposes. That's the case even if the exchange rate fluctuates between the time you obtain the foreign currency and when you actually give it to the foreign recipient.
Receiving gifts from foreign citizens
Gift taxes only apply to the person making the gift, not the person receiving it. Foreign citizens generally don't have liability for U.S. gift tax and therefore don't need to report gifts for those purposes.
However, separate IRS regulations require recipients to report a foreign cash gift. IRS Form 3520 is required if you receive more than $100,000 from a nonresident alien or a foreign estate. In addition, gifts from foreign corporations or partnerships are subject to a lower threshold that is adjusted for inflation each year. For 2016, gifts of more than $15,671 trigger the filing requirement.
You won't owe any tax as a result of filing these documents. However, failing to file them can result in IRS penalties.
The gift tax isn't something that most Americans ever have to deal with. But if you make or receive a foreign cash gift, you'll need to keep the gift tax in mind and make sure you follow all the rules that govern this type of gift.
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