Typically, the person who receives the gift doesn’t have to worry about the tax, because that tax liability typically falls on the donor. Well, if the donor happens to be a covered expatriate then that tax liability may now land on you with the new IRS proposed regulation (REG-112997-10). This regulation deals with gifts or bequests received from covered expatriates.
This tax is called Section 2801 tax and should be reported on the new form 708 (Form 708 is not issued yet until this proposed regulation is finalized). Section 2801 tax is a tax on a U.S. citizen who receives a “covered gift” or “covered bequest” on or after June 17, 2008 from a “covered expatriate” whose expatriation date was on or after that date. Below are some definitions to clear up what they mean by “covered”.
- Covered gift – any property acquired directly or indirectly from a covered expatriate.
- Covered bequest – any property acquired directly or indirectly by reason of the death of an individual who, immediately before death, was a covered expatriate.
There are some exceptions to this tax, one being the normal gift tax exclusion amount, which for 2015 is $14,000. So, the covered gifts/ bequests received during the year would be reduced by this amount. Also, if the covered expatriate filed a timely gift tax return and was reported on the expatriate’s estate tax return and paid on time. Another exemption is for the expatriate’s spouse that is still a U.S. citizen (other rules apply here).
The tax imposed for Section 2801 is high. It is calculated by taking your net amount (after gift tax exclusion, $14,000 for 2015) and multiplying it by the highest gift or estate tax rate in effect for the calendar year, which for 2015 is a whopping 40%! This is a way for the IRS to recoup some of the taxes avoided by expatriating.
Note that there are more special rules and exceptions with this and you may want to speak with your accountant about the issue if it relates to you. The IRS has not issued Form 708 yet, but when it does, any gifts received from a covered expatriate received on or after June 17, 2008 will need to be reported. The IRS will set due dates and interest will not be imposed on these payments until said due date, which should be in the final rules once passed.
By Chris Morrison