If you’ve read Part I, you know that the US imposes a gift tax on gifts of US property for foreign individuals. This includes tangible items like real estate and personal property. If you’re a foreigner and you’ve gifted valuable items or cash to your spouse or someone else in the US, you may owe money to the Internal Revenue Service (“IRS”). Let’s break it down.
We’re focusing on foreign individuals making gifts, not US citizens. If you’re a US citizen, different rules apply.
Foreigners are subject to US federal gift tax on gifts of tangible US property but not on intangible property like stocks. Cash is considered tangible, so be cautious or keep it under $18,000 to avoid tax. There are higher limits for gifts to non-US citizen spouses, reaching $185,000 in 2024. If your spouse is a US citizen, there’s no limit due to the unlimited marital deduction. For gifts to others, consider intangibles like stocks.
Additionally, when a foreign client transfers funds from a foreign holding company to a US person, the IRS may view it as taxable income, even if intended as a gift. This “purported gift” can lead to US federal income tax consequences.
Another thing to keep in mind is that cash gifts can lead to tax traps. For instance, buying something in the US for a child may be considered a taxable gift of US property. Many parents with children that are staying in the U.S. with F1 visas fall into this trap. Planning is crucial, especially for real estate purchases.
Gifts made via a check drawn on a foreign account outside the US aren’t treated as US property. However, using a US financial account may trigger tax exposure. Wire transfers from a foreign account to a US account might be safe, but using a US account for the transfer can lead to tax exposure.
Importantly, don’t forget to consider the tax consequences if the recipient is a US person. A US person may be severely penalized for failure to report a gift. In general, U.S. recipients must report gifts over $100,000 on IRS Form 3520, even if not subject to tax.
These rules are essential, so keep them in mind before you show your love by making a gift. Don’t fall into tax traps. If you need assistance navigating these complex tax matters, schedule a 15-minute free call with us—we’re here to help!
