Recently, the Internal Revenue Service (IRS) issued proposed regulations which would guide U.S. taxpayers who receive gifts or inheritances from specific expatriated individuals (i.e. from certain individuals that gave up their U.S. citizenship). These proposed rules apply to the IRC §877A and §2801, which impose a tax on certain expatriates (expats). Although passed in 2008, the guidance or conditions to comply with §2801 were not introduced until this year.
As the receipt of gifts from expatriates is becoming a more common occurrence, our analysts have prepared a brief overview of this topic. It is advisable that expatriated U.S. citizens consult their tax advisor regarding the applicability of these proposed regulations on gifts to U.S. individuals to prevent unexpected gift tax problems. Note that these are proposed regulations which could change when the regulations are finalized.
Estate Tax Law until Now
Until now, in the case of non-resident aliens including expats, U.S. estate and gift tax were applicable only on those gifts which were U.S. situs assets, such as tangible property located in the U.S. or stock(s) of a U.S. corporation. Thus, when a foreigner or an expat made a gift to a U.S. citizen, there were no tax consequences to the recipient except to file Form 3520, and Form 3520-A if the gifted asset is valued equal to or above USD $100,000; or the filing of Form 8938 if it is an inherited asset.
However, Internal Revenue Code (IRC) §2801 and §887A introduced as a part of the Heroes Earnings Assistance and Relief Tax Act” (HEART Act) in 2008, or “HEART Act” changed this rule to tax any covered expat on a gift he or she makes to a U.S. citizen.
IRC § 2801
Although introduced in 2008, the terms and guidelines to comply with §2801 were not announced until September 9, 2015; although it is in a proposed regulations stage.
The law is applicable on all gifts and/or inheritances received by a U.S. citizen from a covered expat (expatriated in or after 2008), imposing a tax on the gift or bequest equal to the product of:
- The highest rate of tax specified in the table contained in §2001(c) as in effect on the date of such receipt (or, if greater, the highest rate of tax specified in the table applicable under §2502(a) as in effect on the date); and
- The value of such covered gift or bequest
An exemption applies if the funds or gifts qualifies as charitable donation if the expat had been in the U.S. Additionally, there is also an exemption for bequests or gifts made to a U.S. citizen or resident spouse.
Covered Expat
As per the IRS, a ’covered expat’ is a person who either:
- Has an average annual net income tax for the five tax years ending before the date U.S. citizenship is lost, greater than an inflation-adjusted amount of $155,000 in calendar year 2013.
- Has a net worth of $2 million or more (as of the date U.S. citizenship or long-term residency is lost).
- Fails to certify under penalty of perjury that he or she has met the requirements of the U.S. Tax Code for the five preceding tax years or fails to submit evidence of compliance imposed by the IRS.
Additionally for the purpose of §2801, under §877(e), even if a long-term non-resident/green card holder (living for a minimum of 8 years out of the last 15 years, ending with the tax year during which the expatriation event occurs, in the U.S,) renounces their green card, they are treated as a U.S. citizen who lost U.S. citizenship on the date of the renunciation.
Form 708, To Comply With § 2801
The proposed regulations have also introduced new (yet to be issued by the IRS ) Form 708 which is required to be filed by the person receiving the gift or bequest from the expatriate. Form 708 must be filed by the 15th day of the 18th calendar month following the close of the calendar year in which the gift or bequest was received.
Speak to a Tax Professional
That being said, as of now no reporting or tax payment is required until the IRS provides further guidance pertaining to this law or when final regulations are issued. Be advised that as this law would apply on a retrospective basis, it is best to consult a tax practitioner regarding its potential effect, and properly structure the future transfer of an estate or gift to U.S. beneficiaries to possibly minimize the impact of these rules.
AG TAX LLP Can Help
If you have any queries regarding this law, or any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
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