IRS Will Tax Your Inheritance From Uncle Who Fled America
Published Date: 1/14/2025
Rule
Summary
Starting January 14, 2025, if you’re a U.S. citizen, resident, or certain trusts receiving gifts or inheritances from people who gave up their U.S. citizenship or green card, you might owe a new tax. The IRS has set clear rules on how to report and pay this tax, making sure everyone knows what to do and when. This change helps the government track and tax these special gifts and bequests fairly.
Analyzed Economic Effects
8 provisions identified: 2 benefits, 6 costs, 0 mixed.
New Tax on Gifts and Bequests
Starting January 14, 2025, U.S. citizens and residents (and certain trusts) who receive gifts or inheritances from people who gave up U.S. citizenship or lawful permanent residence may owe a new tax under section 2801. The rule applies to covered gifts and covered bequests from covered expatriates and imposes liability on the U.S. recipient.
How the Tax Is Calculated
The section 2801 tax is reported on Form 708 and applies when a U.S. recipient's covered gifts and covered bequests in a calendar year exceed the inflation-adjusted annual exclusion (for example, $18,000 for 2024). The tax equals the excess over that exclusion multiplied by the highest estate tax rate in effect on the date of receipt, reduced by any gift or estate taxes paid to a foreign country.
Trusts: Electing vs Non-Electing Treatment
Domestic trusts and foreign trusts that elect to be treated as domestic trusts are treated as U.S. persons and are subject to section 2801 tax when they receive covered gifts or bequests. Foreign trusts that do not elect to be treated as domestic trusts are not taxed when they receive such transfers; instead, U.S. beneficiaries of those non-electing foreign trusts become subject to the section 2801 tax when they receive distributions attributable to those covered gifts or bequests.
Exception If Donor Files a Timely Return
Property reported on a timely filed gift or estate tax return by the covered expatriate is excluded from being treated as a covered gift or covered bequest. The final regulations removed a proposed requirement that the gift or estate tax also be timely paid for this exclusion to apply.
No Double Tax on Same Property
If the same property was previously taxed under section 2801 as a covered gift, the value of that previously taxed gift is excluded when computing the value of a later covered bequest of the same property. This prevents the recipient from being taxed twice on the same value.
Spousal Exceptions Limited to U.S. Situs Property
The marital exception to being a covered gift or covered bequest (the marital deduction) only applies if a valid QTIP or QDOT election is made, and such elections may be made only for property that is subject to U.S. gift or estate tax (i.e., U.S. situs property). Non-U.S. situs property cannot qualify for that election for purposes of avoiding section 2801 under these final regulations.
Indirect Transfers and Powers of Appointment
The final regulations clarify that indirect acquisitions of property (for example, through intermediaries, entities, trusts, or powers of appointment) can be treated as covered gifts or bequests when the acquisition is, in substance, from the covered expatriate. Acquiring property due to exercise, release, or lapse of a power of appointment (general or non-general) is included for section 2801 purposes.
Timing and Reporting: Form 708 Required
U.S. recipients of covered gifts and covered bequests must report such transfers on Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates, for the calendar year in which they receive the transfers. The regulations also expand related filing and payment rules in several sections to apply to the section 2801 tax.
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