We get a lot of questions about the taxation and reporting of gifts and inheritances from a “foreign person”. These rules aren’t well publicized, so we will provide a basic answer to the question of whether they are taxed and what disclosures may be required to the IRS for U.S. taxpayers.
First, a person who receives the gift is known as the donee, while the individual providing the gift is known as the donor. As the donee receiving a gift or inheritance, it isn’t reported as income and you pay no income or gift tax.
The presumption is that the “foreign person” giving you the money or property, the donor, is paying gift or estate tax. If the donor is a “foreign person”, a cash gift is not taxable, however if the gift is non-cash, it may be taxable if it is U.S.-based property. There are differences in the tax treatment of cash and property where a non-resident alien donor is subject to gift tax on transfers of real and tangible property situated in the United States. According to U.S. tax law, a “foreign person” is a non-resident alien individual or foreign corporation, partnership or estate.
Nevertheless, while tax may not be due by the donee, a gift from a “foreign person” does need to be disclosed to the IRS if it exceeds certain thresholds. A Form 3520 is required to be filed with your individual return if it exceeds this threshold. The IRS instructions for the Form 3520 are here.
Basically, disclosure of your foreign gift or inheritance on the Form 3520 is required if you:
- Received more than $100,000 from a non-resident alien individual or a foreign estate (including foreign persons related to that non-resident alien individual or foreign estate) that you treated as gifts or bequests; or
- Received more than $14,723 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
When calculating these threshold amounts, you must aggregate gifts from different foreign non-resident aliens and foreign estates if you know (or have reason to know) that those persons are related to each other or one is acting as a nominee or intermediary for the other.
Additionally, the IRS may consider gifts from foreign corporations and partnerships as disguised compensation and may re-characterize the gift as compensation that must be included in gross income. However, it is important to note that a gift to a U.S. person does not include any amount paid for qualified tuition or medical payments made on behalf of the U.S. person.
In the case of a failure to report foreign gifts, a penalty equal to 5% of the amount of such foreign gifts applies for each month for which the failure to report continues (not to exceed a total of 25%). No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.
If you have received a gift or inheritance from a “foreign person” and have additional questions or require additional assistance, I can help you in the preparation of the Form 3520 disclosure and any other required reporting.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.