Understanding Taxable Gifts: What Expats Need to Know Now for Your Tax Return
Filing taxes isn’t exactly anyone’s favorite thing to do, but it’s an essential task. Although challenging, filing taxes and reporting everything is vital to stay compliant with U.S. tax laws. Otherwise, you might incur penalties and be charged for non-compliance. Tax laws are full of complicated rules that U.S. expats should be aware of. For one, should you or should you not report gifts as taxable income?
Here’s a rundown of what you need to know about gifts and associated taxes, and what to do when receiving or giving gifts.
Bequest vs. Gift
Gifts and bequests are two terms that individuals often use interchangeably when dealing with taxes. However, these two differ, especially in the manner in which they are given.
A bequest usually describes the act of giving personal assets based on the instructions of a will. These assets may include jewelry, money, stocks, cars, cash, or any personal belongings not attached to the land or real estate. The document should indicate who the beneficiaries will be and how the assets will be divided among them.
Bequests will also have to undergo a probate process. Here, the court validates the assets included in the will before distributing them among the beneficiaries. In the absence of a will, properties are to be distributed according to state laws.
On the other hand, gifting describes the act of voluntarily giving something to someone with no expectations of getting something in return. It may also involve the transfer of property to a person that may entitle you to receive something in return but that may have less value than your gift. Bequests can be a gift, but gifts aren’t necessarily bequests as they may be unrelated to your death or will.
When Does a Gift Become Taxable?
Generally, one can consider cash gifts and inheritances as nontaxable income. This means the receiver won’t have to pay taxes when receiving a gift. But, the government has put a threshold on a gift’s value before the gift tax is applied to the donor of the gift. These thresholds aim to prevent federal estate tax avoidance by gifting money before dying.
Annual Exclusion
The annual exclusion tells you that you can give someone a gift without triggering a tax event as long as it does not exceed the threshold. As of 2023, the annual exclusion value amounts to $17,000. This applies to each gift you give. For example, you can give $17,000 to each of your two children and still not trigger a taxable event.
| Year | Annual Exclusion |
|---|---|
| 2014 2015 2016 2017 | $14,000 |
| 2018 2019 2020 2021 | $15,000 |
| 2022 | $16,000 |
| 2023 | $17,000 |
Once you go over the annual limit, you will have to pay gift taxes. Selling something less than its value or giving out loans at no interest or reduced interest are taxable gift events.
However, there is a lifetime exclusion of $12.92 million in 2023 for taxable gifts. This means you don’t have to pay taxes yet if your accumulated gifts are below the lifetime exclusion.
For example, you gift your niece $20,000 to help her pay for her tuition. From that amount, $17,000 isn’t taxable, but the remaining $3,000 is considered a taxable gift. However, you don’t need to pay taxes for that amount even though it falls under the taxable gift category. Instead, the amount of $3,000 is deducted from your lifetime exclusion and must be reported to the IRS.
If married, you can combine your annual and lifetime exclusion limits with your spouse’s. So, you can have an annual exclusion limit of up to $34,000 instead of the usual $17,000.
What Should You Do When a Gift Becomes Taxable?
If you give a taxable gift:
Normally, the donor is responsible for reporting and paying taxes due from gifts that exceed the limit. As such, you must have a firm understanding of what is a taxable gift so that you won’t have any troubles with the IRS.
For example, selling a property for its fair market value is nontaxable. But, selling it for less than what it’s worth may trigger a taxable event.
The Form 709 or the U.S. Gift (and Generation-Skipping Transfer) Tax Return is the most important document that donors use concerning gifting. The form serves as the primary way of reporting about the gift. This must be filed by April 15 of the following year, even if the gifts do not exceed the lifetime exclusion amount, as this helps the IRS keep a running tab of your lifetime exemption.
Here, you need to state the gift’s fair market value during the transfer, your tax basis as a donor, and the recipient’s identity.
If you receive a taxable gift:
Again, the burden of filing and paying gift taxes falls on the donor in most cases. However, the receiver may have to do the brunt of the work if they receive gifts from foreign persons. This means they’ll have to file Form 3520, entitled Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
According to the IRS, foreign gifts are when U.S. taxpayers receive them from foreign persons, treating them as gifts and not as part of gross income. Taxpayers must also file this by April 15, the same time as the income tax return, but only if it exceeds the set limit. However, this form is only an informational return, and the donee may not necessarily have to pay foreign gift taxes.
Failure to disclose to the IRS gifts over the threshold may result in a 5% penalty of the gift’s amount for each month the report has not been filed.
Know Your Gift Taxes
Taxes can be tedious and complicated. In particular, gift taxes are one of the most challenging tasks to handle considering their various specifications. Aside from filing the right forms, you’ll need to know what constitutes a taxable gift and how to go about it if you’re a donor or donee.
If you’re having trouble keeping up with complicated rules like gift taxes, Tax Samaritan is a team of tax resolution specialists providing professional-quality services to expats since 1997.
Get a Free Tax Debt Analysis →