If you receive a gift from a non-U.S. citizen, first offer your thanks. Then get ready to work through some time-consuming tax complications, because some gifts—as well as inheritances and distributions from foreign trusts—are subject to tax reporting that you might not be aware of.
Which gifts are taxable?
This gets complicated—already—but in general you don’t have to worry about paying a gift tax if your gift came from a foreign national and the gifts are not situated in the U.S. If the gift comes from a spouse who is not a U.S. citizen, it is also tax-exempt. Real estate and other tangible personal property are normally excluded, whereas stocks in foreign corporations are not. If you bring your gifts into the U.S., you don’t have to pay income tax on them, but they can be subject to the gift tax.
Some gift tax rules vary by country because the U.S. has treaties with several countries, so gifts and inheritances from those areas would most likely not be reportable or taxable. You still have to file a gift tax return, though, where you can claim the treaty exemption.
Do you need to file Form 3520?
Form 3520 has the cumbersome name of “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” which should give you some idea of how thorny its 12 pages of instructions can be. Let’s work through some of the basics.
You might need to file Form 3520 if any of these occurred during the tax year:
- You engaged in certain transactions with foreign trusts.
- You own foreign trusts.
- You received a large gift or bequest from certain foreign people, trusts, or estates.
Regarding the latter, as of 2019, you will need to file Form 3520 if you’re a U.S. citizen and you received $100,000 or more from a nonresident alien individual or foreign estate that you treated as a gift or bequest. You also need to file if you received more than $16,388 from foreign corporations or partnerships.
What happens if you don’t file?
As you’d expect, the IRS does not look kindly upon people who fail to file Form 3520. You can be subject to a penalty of up to 25% of the amount of the foreign gift or bequest. You also might be subject to a penalty if you file the form but it’s incomplete or inaccurate.
Insero & Co. is a public accounting firm tax professionals providing individual and business tax services to U.S. citizens and green card holders living outside the United States, as well as foreign nationals living and working in the United States. Our experts deliver customized consulting services and have decades of experience handling foreign investments and tax-related issues.