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Gift Taxes for American Expats
EasyExpat
10 January, 2012 16:10
Article sponsored by TAXESforEXPATS.com
By IJ Zemelman, EA, Taxes for Expats
When something is given without expectation of reimbursement, it’s a gift. When a gift is given, it is taxed as such. As American living abroad, the most relevant gifts to this topic are the things and monies one gives their children and grandchildren. The IRS states that the rules for gift taxes are virtually the same for expats as they are for citizens on U.S. soil. If a U.S. citizen gives a gift to another U.S. citizen, the taxes are the same whether one or both of them are expats.
Excluded Gifts
While there are no gift exclusions that are common to expats, there are gifts that are excluded from U.S. taxation (for citizens on U.S. soil and for expats).
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There is always an annual exclusion for tax free gifting. As of 2011, this amount is $13,000. One may give gifts for or under this amount that are 100% tax free.
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Gifts between spouses are excluded from taxation as long as both are U.S. citizens.
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Political contributions are excluded.
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Gifts specified for tuition or medical expenses are excluded.
Annual Exclusion
For 2011, the amount excluded is $13,000. This means that a U.S. citizen may give tax free gifts of $13,000 or less to as many individuals as he sees fit. If, though, it is necessary for him to give $13,001 or more to any one individual during 2011 (in one or separate gifted amounts), the gift will be taxed and will be required to be filed. For tax purposed, a husband and wife are separate individuals and may both take advantage of the annual exclusion. In this way, both spouses could give a gift of $13,000 to the same child without any gift taxes or filing requirements. It is very important to structure your giving correctly so that penalties are not incurred. For help in this matter, contact an international taxes experts.
Exceeding the Exclusion
If you do give a gift exceeding $13,000 (or the relevant amount for the relevant year), it is important to note that a gift tax is actually a tax on the donor, not the donee. You must file Form 709 to disclose the gift to the IRS. It is unlikely, though, that any taxes will be due right away. Every donor has the right to a lifetime credit equaling the estate tax on $5,000,000. More practically, $5,000,000 at 35% is $1,736,350. Each donor has $1,736,350 in their “account,” and can deduct their incurred gift tax against it.
To avoid the tax, it is often possible to simply structure your gifts wisely. For example, if an american expat desires to gift his son with $52,000, he could gift, tax free, $13,000 to his son, $13,000 to his son’s wife and $13,000 to each of their two children. In this way, he has not exceeded the annual exclusion and will not be taxed or required to file. If, however, he gifted the entire $52,000 to his son, he would be required to file Form 709 to report the gift. The amount reported will be the amount of the gift minus the annual exclusion: $39,000. The father can then choose to pay the gift tax on $39,000 ($39,000 at 35% = $13,650), or he can deduct it from his unified credit ($1,750,000 - $13,650).
Leaving the Family Jewels
It may seem that cash gifts are complicated, but non-cash gifts are much more so. The relevant amount of the gift is the fair market value. Both parties will report this same value for the purpose of filing (if the gift is valued at a greater amount than the exclusion). If the fair market value is not already known, an appraisal will need to take place.
The Donee
Along with inheriting a non-cash gift, the donee also inherits the donor’s holding period and basis. For example, when inheriting the family home, Sam will also inherit his Great Uncle’s basis in the house. Because the home has been in the family for years, the inherited basis will probably fall significantly below the home’s fair market value. If Sam decides to sell the home sometime in the future, he will be required to pay long-term capital gains tax. This tax will be based on the difference between his existing basis and the price he receives for the house.
Gifts to Non Citizens
If a U.S. citizen (expat or otherwise) receives a gift (for example, a check for $500,000) from the UK, there are a few things to take into consideration. If the donor is neither a U.S. citizen or resident, neither the giftee nor the giver will be taxed. The donor will not be taxed, and the donee is not responsible for the payment of gift tax. The donee is required to report certain gifts, however. A gift must currently be reported via Form 3520 if:
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It exceeds $100,000 and is given by a non-resident alien
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It exceeds $13,258 from a foreign corporation or partnership
Non US Spouse
For a U.S. citizen on foreign or American soil, having a non U.S. spouse can greatly complicate taxes, especially in regard to gift giving. While U.S. spouses can gift, tax free, without limits, the rules change when one spouse is not a U.S. citizen or resident. While there are many differences, for the purpose of this article we will discuss the differences in gift giving alone. In 2011, the amount to be gifted, tax free, from a U.S. citizen to a non U.S. spouse, was $134,000. The gift tax and the inheritance tax work together resulting in serious repercussions for those U.S. citizens with alien spouses. The current tax is 45% on transfers exceeding $5,000,000. Although this figure fluctuates severely, it is always wise to consult a tax planner if you have a million or more dollars in cash or other assets.
As long as one takes the time to learn the rules beforehand, he/she can avoid the common pitfalls. The most serious consequences come from gift giving without tax planning. The key is understanding when to file, and taking advantage of the exemptions wherever possible. For help with you taxes and gift giving, contact the experts at Taxes for Expats today.
IJ Zemelman, EA is the founder of Taxes for Expats
She may be reached at questions@taxesforexpats.com or +1-646-EXPAT-US
Web site: www.taxesforexpats.com
EasyExpat on 
This is really a nice article on gift taxes, everything is very interesting and informative. However, I believe that although gifted real estate receives no step up in basis, inherited real estate is stepped up in basis. http://www.irs.gov/...en_US_2010_publink1000257012
Provided the recipient did not receive the property within one year of death basis should be stepped up.
