Foreign Citizes & Gifts to U.S. Persons: (New) Tax Implications (Examples)

US Tax Implications for Gifts from Foreign Citizens

US Tax Implications for Gifts from Foreign Citizens

US Tax implications for Gifts from Foreign Citizens: In general, the IRS taxes US persons on their worldwide income. From a baseline perspective, a gift is not income. Depending on the facts and circumstances surrounding the gift, there may be tax and reporting consequences. Oftentimes, the tax and reporting rules catch taxpayers by surprise, because a basic Google search on foreign gifts will generally conclude that there are no US tax implications for receiving a gift from a foreign citizen — but that is not always the case.

Sometimes, there may be tax consequences for a US person who receives a gift from a foreign person.

Three (3) Examples of Foreign Citizen Gifts & U.S. Tax Implications

Let’s review three situations in which there may be US tax implications for receiving a gift from a foreign citizen or other nonresident alien.

Gift of U.S. Real Estate – Gift Tax

In general, a nonresident alien does not have to pay tax in the United States on capital gains earned from US-related companies. In addition, the transfer of property as a gift between US persons is generally not taxable either until the lifetime gift exclusion amount is exceeded. One exception is when a nonresident alien gives US real estate (or other USRPI) to a US person.

Here is a common example: Dario is a permanent resident student who resides in the United States. His (nonresident alien) parents want to purchase some property in the United States and gift it to Dario. If the foreign parents purchase the US real estate themselves (without setting up a US structure or entity) instead of gifting Dario the money — and then gift the property to their son Dario, there is an immediate gift tax consequence to Dario’s parents.

U.S. Income Tax from Foreign Real Estate – Income Tax

Dario’s parents decide that they would like to keep the real estate they purchased under their own name to avoid any gift tax consequences. Instead, they rent the property out to a US person, who pays $3,000 monthly rent. Dario’s parents want to maintain the purse strings, so their goal was to first collect the rent and then put half of it into Dario’s account for living expenses.

Since Dario’s parents are foreign owners of US real estate and collecting US rent, Dario’s parents are subject to a 30% withholding (FDAP) by their tenant unless they apply for and receive certain certifications — and file an annual tax return to report the income as ECI instead of FDAP.

Income Earned from a Gift – Income Tax

Instead of gifting Dario the property outright, Dario’s foreign national parents have a different idea. Dario’s parents are wealthy and have an investment account outside of the United States that generates about $50,000 in annual passive income. Dario’s tuition is $40,000 annually. If Dario’s parents were to pay the tuition directly to the institution, it could be considered a gift that would not be taxable. Instead, Dario’s parents put the investment under Dario’s name so that the income generates under his name directly and then he can withdraw the money.

In the latter scenario, Dario is subject to income tax on his worldwide income and therefore will have to pay tax on the earnings. What makes this tax implication worse is that in the foreign country, this type of passive income escapes income tax — which means there are no foreign tax credits.

Oftentimes a bit of international tax planning can help avoid these unnecessary gift-related tax consequences. Dario and/or his parents should have consulted with a tax attorney prior to making any gifts.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and US Tax Implications for Gifts from Foreign Citizens.

Contact our firm today for assistance with getting compliant.