Understanding the US gift tax is important for both US and non-US persons. It comes as a big surprise to many people that US gift tax issues can arise in many unanticipated ways, such as sending money to an adult child attending college; making loans interest-free to family members or giving them loans with below-market interest rates. Even non-US persons can get caught in making such unanticipated gifts and can be hit with US gift tax! First, some basics.
What is the Gift Tax? Who Pays the Gift Tax?
The US Gift Tax is a “transfer” tax and not an “income” tax. The transfer tax is asserted against the person making the transfer (i.e., the giver of the gift; also called the donor), not against the recipient of the gift. The US gift tax rules apply to a US person (US citizen or “resident”) differently than to a non-US person (non-citizen and non-resident). Generally, US persons are subject to gift tax on their worldwide assets. In other words, the tax applies when the US person makes gifts of assets regardless of where the assets are located at the time of the transfer.
Non-US persons are generally subject to US gift tax only on tangible assets located, or deemed to be located, within the US at the time of the gift transfer. Intangibles are exempt from gift tax for non-US donors, even if the transfer of the intangible occurs within the US. For example, shares of stock in a US company are assets deemed to be located in the US; but since such shares are intangible assets, a gift of these shares by a non-US donor will not be subject to gift tax.
An annual exemption is available for both US and non-US donors. The exemption applies to gifts of US$17,000 per recipient per year for both US and non-US person donors.
When is a Non-US Citizen a US “Resident” for Gift Tax Purposes?
When a non-US citizen makes gifts (or bequests), the question of whether he or she will be treated as a US “resident” for purposes of these transfer taxes is very important. The rules regarding residency for transfer tax are different from those for income tax purposes. Thus, a green card holder (while automatically treated as a “resident” for US income tax purposes) will not necessarily be a US “resident” for the US estate and gift tax rules.
The issue involves the concept of “domicile”. Under the relevant Treasury regulations, to be domiciled in the US for estate and gift taxes, physical presence must be coupled with the requisite intent to remain indefinitely or permanently. Often, the determination of domicile is not entirely clear. Various factors are considered by the Internal Revenue Service (“IRS”) in determining domicile for the gift and estate tax rules. Full details at my blog posts here and here.
Cash, Checks and Wire Transfers: Tangible? Intangible?
When a “nonresident” makes a gift of cash, checks, or bank wire transfer directly to a US recipient, depending on the amount of the gift, the donor could unknowingly become liable for US gift tax. The IRS has taken the view that cash and wire transfers of cash are tangible personal property. (See, .e.g., PLR 200340015 June 27, 2003 “Trust was funded with cash transferred directly from A’s accounts in Country 2 to Trust. …. A, a nonresident alien, transferred cash, which is tangible personal property for purposes of § 2501(a)(2)….” Thus, if a gift of cash is treated as made within the US, gift tax can result to the foreign donor. A check is a physical embodiment of cash, and a similar rationale would apply.
As a practical matter what do these rules mean for the foreign person wishing to make such gifts to US recipients? Bear in mind, when we say “gifts” this can apply in unexpected situations – such as sending an adult child money for tuition, room and board etc. or sending a close relative funds for their general support needs. There are workarounds for such situations, but if the donor does not know of the potential problems lurking with his generosity, problems can arise.
Next week’s blog post will examine the practicalities of gifting by foreign nonresidents to persons within the US. It will go through the “do’s” and “don’ts” of gifting. Which bank accounts should be used? What steps can be taken to prevent imposition of the gift tax? Stay tuned!
Do you need information about US gift and estate tax issues for US and non-US persons? Receiving foreign gifts or inheritances? My tax blog posts address these issues in a clear manner. Check the Blog Post Categories page on my website. Make sure you tet the right tax advisor. When it comes to international tax issues there is no substitute for an experienced professional.
Posted April 27, 2023
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