Many foreign individuals are surprised to learn that they may be subject to U.S. gift tax when making seemingly innocent transactions with family members in America. Sending money for tuition or a wedding gift, or gifting property to a relative can unexpectedly trigger U.S. gift tax obligations. Understanding the basics of the gift tax is crucial to avoid complications in the future.
The U.S. gift tax is a transfer tax imposed on the donor making the gift transfer, not the recipient. U.S. citizens and residents are taxed on global assets, while non-U.S. persons are only taxed on tangible assets located in the U.S. Non-U.S. donors can gift $18,000 per recipient per year without triggering gift tax, but they do not have access to the large exemption amount available to U.S. citizens and residents.
Determining residency status for gift tax purposes focuses on the concept of “domicile”, which requires physical presence and intent to remain in the U.S. indefinitely. The classification of gifts like cash, checks, or wire transfers as tangible assets complicates matters for non-U.S. donors. The IRS treats these transfers as tangible personal property, potentially subjecting foreign donors to gift tax liabilities.
To avoid U.S. gift tax obligations, foreign non-residents must tread carefully when making gifts to U.S. persons. Strategies to avoid these taxes include transferring funds from a personal foreign account directly to the recipient’s foreign account or from the donor’s foreign account to the recipient’s U.S. account. Direct or indirect gift transfers from foreign corporate accounts can complicate tax matters for the recipient, so it’s best to make gifts from personal foreign accounts.
Instead of transferring cash, foreign donors can consider gifting intangible assets like U.S. stocks or bonds to avoid gift tax liabilities. Additionally, payments made directly to educational institutions or healthcare providers for tuition or medical expenses are exempt from gift tax. Professional guidance is recommended to navigate the complexities of U.S. gift tax rules and avoid potential issues in the future.
