Received a Foreign Gift in 2023? Learn About Taxes on Gifts and IRS Form 3520

9 MIN READ

Today, 13.7% of people in the U.S. are immigrants, so understanding taxes on gifts is essential, especially when the money is from family in another country.

So are gifts taxable when received from another country?

The monetary gift tax laws differ from the gift tax exclusion for gifts from U.S. citizens. However, in most cases, the recipient isn't liable for the federal taxes, but the donor might be.

Here's what you must know.

IRS tax forms to determine how to report gifts on tax return

Taxes on Gifts From Foreign Individuals

The United States doesn't impose gift taxes on gifts received from foreign individuals, so it's not taxable income and doesn't create a tax burden.

In addition, the gift giver isn't liable for gift taxes because they aren't in the U.S. However, there are specific filing rules U.S. citizens must follow if the gift exceeds the gift tax exemption limits.

What Are Foreign Gifts?

First, know that foreign gifts refer to any money or property received that the recipient doesn't consider a part of his gross income.

The gift can be from any of the following

Non-resident aliens, such as parents living abroad
Overseas corporations or partnerships
Foreign estates that transfer real estate
Non-resident alien-owned U.S. domestic trusts

Most cash gifts aren't subject to the federal gift tax. However, any tangible property may cause the donor to be responsible for the monetary gift tax, not the recipient. Most gifts received by foreign individuals are tax-free for the recipient.

It's also essential for the donor to determine if their country requires them to pay taxes on the gifts.

Does the U.S. Have a Foreign Gift Tax

The answer to 'Do you have to pay taxes on monetary gifts from a foreigner' is complicated. The short answer is 'no,' but this only applies to cash or cash-equivalent gifts. Tangible gifts may be considered taxable and subject to gift tax rates.

However, there are special rules and strict tax reporting requirements, including gift tax limits, which we touch on below. Some thresholds determine your federal tax filing requirements.

Requirements for Reporting Taxes on Gifts

U.S. citizens are responsible for filing the Internal Revenue Service (IRS) Form 3520 for the necessary tax year. This form is complicated, so working with a licensed, certified public accountant may be in your best interest.

First, determine if your gift amount exceeds the monetary gift tax limits. Be sure to include the aggregate from any related parties. If so, you will need the following information to file IRS Form 3520:

Gift type
Gift value (if non-cash, you must provide current fair market value)
Donor name and address
The date you received the gift

After completing the form, mail it to the following address:

Internal Revenue Service Center

P.O. Box 409101

Ogden, UT 84409

IRS Form 3520 must include your signature, and you must make every attempt to file the form on time.

Individuals vs. Entity Gift Annual Exclusion Thresholds

The thresholds in the United States to receive gifts from a foreigner include any gifts received that exceed the annual exclusion of $100,000 from a non-resident alien or foreign estate must be reported.

This doesn't mean you must pay taxes on the money. But you must file IRS Form 3520 and report any gifts above $5,000 individually.

Any gifts received from a foreign corporation or partnership have higher limits. If foreign gifts from a corporation or partnership exceed the annual exclusion amount of $18,567 in 2023, you must report them. Also, no matter the amount, each gift must be reported individually.

Please note: If you receive individual gifts from multiple people or corporations that may be related, you must combine the gifts for an aggregate amount. If the total exceeds the limits above, you must file IRS Form 3520.

It seems that the lifetime gift tax exclusion does not apply to foreign non-residents.

3520 Form Exceptions

There are a couple of form exceptions regarding gift tax returns. There isn't a filing rule if the money received is for qualified tuition at a U.S. school or for medical bills. This is one of the best ways to learn how to avoid foreign gift tax.

How to Transfer the Funds

Donors have two ways to transfer funds to the person receiving the gift. They can transfer the funds to the donee's U.S. bank account or the donee's foreign bank account.

The simplest way for the recipient is to receive the funds in their U.S. account. If the funds go to a foreign account, the donee must still file IRS Form 3520 if it exceeds the thresholds. However, the recipient must file the Foreign Bank and Financial Accounts Reporting form (FinCEN Form 114) if the account's balance exceeds $10,000.

In addition, the recipient may need to file IRS Form 8938 to report the financial assets.

Gifting Limits Example

Jennifer moved to the U.S. from Greece, leaving her parents and family behind. She originally entered the country as a student but found a great job and decided to stay on a green card.

Now, Jennifer wants to buy a house, and her parents want to help her financially. They transfer her $125,000 via direct deposit to her bank account in the U.S.

Jennifer's never lived in the U.S., so their gift isn't considered from an expatriate. Since the gift amount exceeds the $100,000 limit, it will trigger the gift tax rules from foreign countries. Jennifer must report it on IRS Form 3520 but not on her tax return because it is not income.

The same requirements would be in place if Jennifer received $75,000 from her parents and another $50,000 from her grandparents, who also live abroad. Because the donors are related to her, the gifts must be aggregated. As a result, IRS Form 3520 must be completed, with each gift indicated individually.

Breaking Down Taxes on Gifted Money

The IRS has different rules based on a donor's citizenship. Understanding the distinction is important so all proper forms and applicable taxes are paid.

From Non-U.S. Citizens Who Are Non-Residents

Non-U.S. citizens who are non-residents aren't usually subject to the gift tax. However, if the donor used to live in the United States, they may be considered a repatriate, subjecting them to different tax rules. A repatriate is someone who lived in the United States but has since returned to his home country.

Taxes and Repatriation

A repatriate status can affect the gift tax obligation depending on how long they lived in the U.S., according to IRC 877A.

If the non-resident lived in the United States for over eight years but gave up his citizenship to return to his home country, he is a repatriate.

In cases like this, the repatriate is subject to the gift tax rules, just like a U.S. citizen. However, the final determination has yet to be decided, so any tax owed is currently deferred.

Under this rule, it doesn't matter if the person giving money away lived in the U.S. two years or ten years ago—the gift tax return rules still apply.

From a Foreign Company

If donations received from a corporation or partnership exceed the annual gift tax exclusion amount, you must report it on IRS Form 3520. But again, not on your tax return. Be sure to indicate each company that gifted funds when filing.

Non-Monetary Taxable Gifts

Recipients aren't required to pay taxes or report personal gifts to the IRS if the gift is non-monetary, such as physical property or other tangible gifts. However, the donor may be responsible for U.S. transfer taxes if the gift property is located in the United States.

Consequences of Not Filing Foreign Gifts

In most cases, there aren't tax consequences on foreign gifts, but there are severe consequences for not reporting the income.

The current penalty is 5% of the foreign gift per month, up to 25%. However, if you can prove that you didn't file taxes due to circumstances outside your control and not just negligence, you may avoid the penalty.

Common reasons for avoiding the penalty include:

Lack of awareness of the penalty
Bad advice from financial advisors

You can also provide proof that you tried to remain compliant but could not.

FAQs

Can I Deduct Foreign Cash Gifts From My Income Taxes?

You don't need to report foreign cash gifts as long as they are below the year's current threshold. For 2023, the limit is $100,000. If your cash gifts are less than this amount, you do not have to report them, but you shouldn't deduct the amount from your federal income tax. Always consult a tax professional for your individual situation.

How Much Money Can Be Gifted Tax-Free?

Recipients of cash gifts from a U.S. resident usually don't pay taxes on the income. Instead, the donor pays a gifting money tax, but only if they gift over $17,000 to one person in 2023. The threshold changes annually for the taxable gift amount.

Is Gifted Money Considered Income?

You might wonder if a cash gift is considered income. According to the IRS, the money gift tax doesn't apply to money received as a gift, whether from a U.S. citizen or non-resident. This money is not considered income, so you don't have to report it on your tax return. However, foreign gifts have other rules and may trigger IRS Form 3520 requirements.

Conclusion

It can be complicated figuring out whether there are taxes on gifts or if you're subject to the gift tax exemption. The IRS has strict rules, and in the case of foreign gifts, it has filing requirements but no tax liabilities incurred.

It's best to work with tax professionals who can ensure you follow the law properly instead of filing your own taxes and taking a risk.

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