The (Foreign) Gift That Keeps on Giving

Some gifts are not so fun
BY: ORLANDO GOTAY

The IRS gets very antsy when it comes to things foreign. I am going to hereby coin “Orlando’s General Rule of Sospechosidad” (that last word is made up, it’s meant to be “suspiciousness”): If it’s foreign, there’s likely a special IRS rule nearby.  And what would you know, today’s topic, foreign gifts, does indeed have one.  That leads to my Second General Rule:  Where there’s a rule, there’s the trap for the unwary!

We all like gifts. But there is something special about gifts (and bequests) that come from foreign persons.  Did you know, a bequest is a gift that comes from the afterlife! (Actually, from the estate of the dearly departed).

If you receive a gift from a foreign person and it is over a certain amount, you have to report it to the IRS.  As with some of these things, reporting does not mean you necessarily pay tax on it, it’s just a report that the gift took place.

The IRS is especially interested in knowing about foreign gifts (or bequests) of $100,000 or more during the year.  They are wise to splitting gifts to “limbo” one’s way around the rule, so related people’s gifts are all added up.  If foreign spouse A and B give you separate gifts of $50,000 and $60,000 it meets the test. Over $100,000 in gift from related persons, report you must!

Note: I can think of a US person dying having a foreign estate, which means that any bequest from such estate is foreign.  It’s reportable if over the amount.

Gifts from foreign corporations and trusts are reportable at much lower thresholds, $15,797.  If a real person is related to the corporation (for example, by ownership) any gifts from them count toward the corporation thresholds.  Generally speaking, “gifts” from foreign corporations and trusts are a bad idea.  Lastly, you can have a “gift” even if it did not come wrapped with a bow.  If the corporation allowed you to use property it owns, without paying, guess what—that is a gift, to the extent of the fair market value of that use. Worse, some of those corporate gifts may also be taxable to you as regular income…what a gift that is. Told you there are traps.

These gifts and bequests are reported on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.

Gift away! ¡Gracias!

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the federal and state tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.  This is just a most general outline, and is of course, informational only and not meant as legal advice.