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IRS Proposes Rules to Tax Gifts from Expatriates


October 21, 2015
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The IRS recently issued a new set of proposed rules on taxes for high-net-worth individuals in the U.S., including citizens and residents, who receive gifts from expatriates. According to the National Law Review, the tax is significant because it is designed to disincentivize U.S. citizens from expatriating individually.

The new rules

The proposed tax, which is part of the Heroes Earnings Assistance and Relief Tax Act of 2008, provides a final answer on whether or not a distribution from expatriates would be considered a gift. These gifts from expatriates are subject to the proposed tax retroactive to June 17, 2008.

The way the new tax works is that the amount of the tax for a gift from an expatriate is determined by subtracting the total amount of covered gifts received during the calendar year by the amount of the expatriate’s gift. The total amount of gifts that are exempt from taxes is $14,000, so this number is subtracted from the amount of gifts from an expatriate. Then this net amount is multiplied by the highest estate or gift tax rate in effect during the year the gift was received.

Less obvious things to look out for

One of the new stipulations of the proposed rule is that there is a pro-rate regulation that subjects foreign trusts to taxes when they includes donations from expatriates that fall under this rule. What this means is that if an expatriate provides half the funds for a foreign trust for his or her family, half of that trust is subject to the tax – even if those include shares in a family business, for example. However, another factor to keep in mind is that taxpayers entitled to income tax deductions from foreign trust distributions need to be aware that the deductions are only applicable in the year the tax is paid. This is important because the deduction does not apply to when the distribution is made.

The expatriate is not subject to the tax, but the property included in their gross estate that is transferred to recipients is subject to tax. Further, if the expatriate’s gifts are deemed charitable donations, then the gifts are exempt from the tax. A final exemption applies to marital status, which states that if expatriates send gifts to spouses that are U.S. citizens or residents, these gifts are tax exempt.

A definitive distinction of the proposed rules is that if a U.S. citizen or resident receives a taxable gift from an electing domestic or foreign trust, the receiver is subject to the tax. However, if the gift is distributed through a non-electing foreign trust, that trust is not liable for the tax, but the recipient is subject to the tax.