Covered Expatriate Gift and Bequest Tax — Section 2801 Tax on U.S. Recipients

When a U.S. citizen or long-term resident renounces citizenship or gives up their green card with significant wealth or tax history, they become a covered expatriate subject to the § 877A exit tax. But a separate provision — 26 U.S.C. § 2801 — imposes an additional tax not on the departing person, but on the U.S. citizens and residents who later receive gifts or inheritances from that covered expatriate. The section 2801 tax is paid by the U.S. recipient at the highest applicable gift or estate tax rate (currently 40%) on the value received, regardless of whether any gift or estate tax would otherwise apply. There is no annual exclusion credit, no unified credit — just a flat 40% tax on the value of any covered gift or bequest above the annual gift tax exclusion amount ($18,000 in 2026). The rules apply to direct gifts, inheritances, and distributions from foreign trusts funded by covered expatriates. IRS finalized the implementing regulations in 2024 (T.D. 10004) after more than 15 years of operating under proposed rules, creating the first comprehensive framework for compliance.

Current Law (2026)

What This Tax Does

26 CFR Part 28 — effective September 10, 2024 under T.D. 10004 — provides the first finalized implementing rules for the § 2801 tax. The tax works in two steps:

Step 1 — Who is a covered expatriate? A covered expatriate is an individual who has renounced U.S. citizenship or ceased to be a lawful permanent resident and who meets any one of three thresholds:

• Net worth test: net worth of $2 million or more on the date of expatriation
• Average annual tax liability test: average annual U.S. net income tax for the prior 5 years exceeds $190,000 (indexed for inflation; 2026 threshold approximately $210,000)
• Certification failure: failed to certify 5 years of compliance with all U.S. federal tax laws

Step 2 — What is taxable? Any U.S. citizen or resident who receives a "covered gift" or "covered bequest" from a covered expatriate owes the § 2801 tax:

• Covered gift: any property received from a covered expatriate by gift, to the extent the value exceeds the annual gift tax exclusion ($18,000 in 2026). The exclusion applies separately to each donor, not in aggregate across all covered expatriates.
• Covered bequest: property received at death from a covered expatriate that would have been included in the expatriate's estate if they had remained a U.S. person — essentially, any inheritance.
• Foreign trust distributions: distributions from a non-electing foreign trust to the extent attributable to contributions made by a covered expatriate are treated as covered gifts or bequests when received by a U.S. recipient.

Key Provisions (26 CFR Part 28)

• § 28.2801-1 — Imposes the § 2801 tax on U.S. citizens and residents receiving covered gifts and covered bequests from covered expatriates, effective for receipts on or after June 17, 2008.
• § 28.2801-2 — Definitions: "U.S. recipient" means any U.S. citizen or resident (domicile-based, not just citizenship); "covered expatriate" has the same meaning as in § 877A(g)(1); a "covered gift" is any gift to a U.S. recipient from a covered expatriate above the annual exclusion; a "covered bequest" is any bequest, inheritance, or devise that would have been included in the covered expatriate's taxable estate had they been a U.S. person.
• § 28.2801-3 — Rules and exceptions for covered gifts and covered bequests: transfers subject to U.S. gift tax by the donor (because the gift was of U.S. situs property) are excluded from § 2801 tax — no double taxation. Similarly, property included in the covered expatriate's gross estate that was subject to U.S. estate tax is excluded. Property transferred to a U.S. spouse (eligible for the marital deduction) is excluded. Charitable transfers to U.S. public charities are excluded.
• § 28.2801-4 — Liability and computation: the U.S. recipient is liable for the tax. The tax equals the covered gift or bequest amount multiplied by the highest gift tax rate in effect (40%). If the U.S. recipient is receiving gifts from multiple covered expatriates in a year, the annual exclusion applies separately to each donor. The recipient must compute and pay the tax even if the covered expatriate filed no returns in the U.S.
• § 28.2801-5 — Foreign trusts: a U.S. recipient who receives a distribution from a foreign trust that was funded (in whole or part) by a covered expatriate owes § 2801 tax on the proportion of the distribution attributable to covered expatriate contributions. The trust may elect to be treated as a domestic trust for § 2801 purposes (the "electing foreign trust" election) — if it does, the trust itself pays the § 2801 tax on distributions rather than imposing the tracking burden on each U.S. beneficiary.
• § 28.2801-7 — Responsibility: the U.S. recipient has the obligation to determine whether the donor or decedent was a covered expatriate. The IRS provides no automatic notification — the recipient must independently verify the transferor's covered expatriate status, which may require asking the transferor or their estate to provide documentation. If the recipient cannot determine covered expatriate status, a conservative approach is to file Form 708 and pay the tax.
• § 28.6011-1 — Return requirement: U.S. recipients must file Form 708 for each calendar year in which they receive covered gifts or covered bequests. The form is filed separately from the recipient's income tax return (Form 1040) or estate tax return.
• § 28.6071-1 — Due date: Form 708 is due on April 15 of the year following the year the covered gift or bequest was received, with automatic extensions to October 15 available. The tax is paid with the return.

How It Affects You

If you receive a gift from a former U.S. citizen: Gifts from foreign persons are not normally subject to U.S. tax — but if the donor was a "covered expatriate" (net worth over $2M or high prior tax liability), you owe 40% on the amount received above the annual exclusion ($18,000). You are responsible for determining the donor's covered expatriate status and filing Form 708. Ask the donor for a copy of their expatriation documentation (Certificate of Loss of Nationality) and their prior tax filings to determine covered expatriate status.

If you inherit from a covered expatriate: Inheritances from foreign persons are generally not taxed in the U.S. — the exception is § 2801. A U.S. heir who inherits $10 million from a covered expatriate parent owes $4 million in § 2801 tax, in addition to any income tax consequences from the inherited property. The estate of the covered expatriate does not pay U.S. estate tax (only exit tax applies under § 877A), but the U.S. heirs pay the § 2801 tax on receipt.

If you are a beneficiary of a foreign trust: Foreign trust distributions may be subject to § 2801 if the trust was funded by a covered expatriate. If the trust makes the "electing foreign trust" election, it will handle the § 2801 tax calculation and withhold it before distribution — ask the trustee whether the election has been made. If not, you may need to track what portion of the trust corpus came from covered expatriate contributions.

If you are planning your estate and considering renouncing citizenship: Understand that renunciation as a covered expatriate doesn't just trigger the § 877A exit tax on your own assets — it also imposes a 40% tax on every future gift or bequest you make to U.S. recipients for the rest of your life. This is a significant long-term cost of covered expatriate status that many people overlook when focusing solely on the exit tax.

Statutory Authority

This regulation implements:

• 26 U.S.C. § 2801 — Imposes the "section 2801 tax" on U.S. citizens and residents who receive covered gifts and covered bequests from covered expatriates; sets the 40% rate and the covered gift/bequest definitions
• 26 U.S.C. § 877A — The underlying "exit tax" on covered expatriates (deemed sale of worldwide assets on expatriation date); defines "covered expatriate" thresholds that trigger § 2801 obligations for future recipients
• Pub. L. 110-245, § 301 — Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), which enacted § 2801

Recent Developments

• Final regulations published September 2024 (T.D. 10004): The IRS finalized Part 28 regulations after more than 15 years of operating under proposed rules from 2015. The final rules resolved long-standing questions about the electing foreign trust mechanism, the application of the annual exclusion, and how to handle situations where the recipient cannot determine covered expatriate status. Applicability date is September 10, 2024 — transactions occurring before that date are still subject to the proposed regulations.
• Form 708 modernization: The IRS updated Form 708 (United States Return of Tax for Gifts and Bequests Received from Covered Expatriates) in connection with the 2024 final regulations, providing clearer instructions for calculating the tax and determining covered expatriate status.
• Increased enforcement scrutiny: FATCA and the network of intergovernmental agreements (IGAs) have made foreign financial account information more available to the IRS, increasing the likelihood that large gifts and bequests from former U.S. citizens will surface in enforcement. Recipients who fail to file Form 708 face late filing penalties and interest on unpaid tax.

Pending Action

(Left for wiki-enrich — interaction with proposed HEART Act modifications and § 2801 reform proposals in estate tax reform discussions.)