United States tax laws are quite complicated. The legal terminology, fine print, and changing legal landscape make it nearly impossible for U.S. citizens to keep up.
It can be even more overwhelming for non-citizens, especially when you’re already so busy providing for your loved ones back home. Who has time to worry about the intricacies of tax law?
While taxes are integral to most areas of life, they are surprisingly less involved in the world of financial gifts. Whether you’re sending money home or receiving a gift from abroad, chances are you’ll never have to worry about paying taxes. At the very most, you’ll simply have to process some extra paperwork.
Here’s a brief overview of the U.S. Tax Implications on Money Gifts:
Sending Gifts Abroad
Gifts non-citizens send to families abroad are largely subject to the same rules as U.S. citizens. While there have been legislative proposals to tax remittances in recent years, most financial gifts remain protected from tariffs.
The majority of financial gifts sent abroad will be tax-free unless they exceed the following limitations:
- You give gifts of future interests (i.e. reserving a life estate in real estate or funding a trust). Future interest gifts are taxable and must be reported to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax. You can download the form here.
- Your annual financial gifts to anyone other than your spouse exceed $15,000 (as of 2020)
- Your gifts to your spouse who is not a citizen of the United States total more than $157,000 (as of 2020)
The one primary difference between non-citizens and U.S. citizens involves making gifts to your spouse. While most financial gifts U.S. citizens give to spouses are eligible for an unlimited marital deduction, non-citizens cannot exceed the annual cap of $157,000 without incurring a tax.
The good news is, all of these limitations fall under an even broader category known as “lifetime exemptions.” Thanks to the Tax Cuts and Jobs Act of 2017, the gift and estate tax exemption was doubled from $5 million to $10 million. As of 2019 (and accordingly adjusted for inflation), that exemption now totals $11.4 million for U.S. citizens and non-citizens alike. This legislation will stay in effect until 2025.
So what does this mean for you and the money you send home? Even if your annual gifts exceed the $15,000 limit (or $157,000 cap for your spouse), it’s unlikely you will pay taxes on them, since the $11.4 million lifetime exemption protects you.
Receiving Gifts From Abroad
You can send money to friends and family tax-free. But what about receiving gifts from abroad?
Here’s some more good news: any financial gifts you receive from friends and family abroad will also not be taxed by the IRS. In fact, you don’t even have to report your gifts if the annual total received by a foreign individual or estate is less than $100,000.
In the event that your received financial gifts do exceed $100,000, the IRS will expect you to report them on Form 3520. This is more of a formality than a tax.
While separate from your income tax return, the IRS formally states this “information return” will be required in two instances:
- When gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate)
- When gifts valued at more than $16,076 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).
You can complete the information return at the same time as your annual tax return.
While it is unlikely that you will be taxed for these financial gifts, keep in mind that the IRS will harshly penalize incomplete or inaccurate filings, so be sure to check out the IRS website for specific instructions.
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