The Internal Revenue Service imposes a tax when you make cash gifts to any recipient, regardless of their nationality or country of residence. A U.S. recipient of a foreign cash gift, on the other hand, has an obligation to report it to the IRS, but will not owe tax on it. However, there are exceptions to the tax laws that apply to both the donor and recipient when there are foreign implications to the gift.
Taxable Foreign Gifts
As a U.S. citizen, there is no escaping your gift tax obligations when making the gift from a foreign country or from the U.S. to a person in a foreign country. Generally, the value of annual gifts you make to each recipient that exceeds the annual exclusion -- and is not to a spouse, a charity or a direct payment of an individual’s medical or tuition bills -- is taxable and will require you to report the gift on a gift tax return. The annual exclusion is the maximum value of all gifts of cash and property you can make to separate recipients without incurring any gift tax reporting or payment obligations. However, the exclusion amount is tax-year specific and is subject to change.
Reducing Taxable Gifts
Making foreign cash gifts in excess of the annual exclusion doesn’t necessarily mean you have to pay gift tax on it when you file your gift tax return. The tax law allows every taxpayer to take advantage of their unified credit to eliminate the tax on taxable gifts. You have access to a $1 million credit to use during your entire lifetime, but as you use it, you must reduce the balance available for future years. For example, suppose you make a $100,000 gift to your cousin in Germany in a year the annual exclusion is $13,000. This means you must report a taxable gift of $87,000 on a gift tax return. However, you can reduce your taxable gift to zero by using your unified credit, but if you do, you must reduce the credit balance by $87,000.
Foreign Currency Issues
For purposes of evaluating the amount of your cash gift, you always use the value at the moment you make the gift. This is easy to assess when you make the gift using U.S. currency. However, if you use foreign currency, you must determine what the U.S. dollar equivalent is at the time of making the gift before evaluating the gift tax implications.
Receiving Foreign Gifts
If you are on the receiving end of the foreign cash gift, you never have to pay income or gift tax on it, but you may still need to report it to the IRS. You have an obligation to report the gift on Form 3520 to the IRS by the same due date as your tax return only if the amount of cash you receive from a foreign person is more than $100,000. However, if you receive the funds from a foreign partnership or corporation, you must report all gifts that exceed $14,165 as of 2011.
- IRS: Publication 950 – Introduction to Estate and Gift Taxes
- IRS: FAQ on Gift Taxes
- IRS: Form 3520
- Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed Oct. 16, 2020.
- Internal Revenue Service. "2020 Instructions for Form 709," Page 19. Accessed Oct. 16, 2020.
- Internal Revenue Service. "What's New – Estate and Gift Tax." Accessed Oct. 16, 2020.
- Internal Revenue Service. "2020 Instructions for Form 709," Page 7. Accessed Oct. 16, 2020.
- Internal Revenue Service. "2020 Instructions for Form 709," Page 8. Accessed Oct. 16, 2020.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.