U.S. citizens who receive a gift or an inheritance from a former U.S. citizen, who renounced their citizenship after 2008, may find themselves with an unexpected U.S. tax bill.
Back in 2008, the U.S. Congress passed the Heroes Earnings Assistance and Relief Tax Act ("HEART Act of 2008"), which added Code Section 2801 to the U.S. Internal Revenue Code. Code Section 2801 imposes a tax on the recipient of a gift or bequest from certain U.S. citizens or Green Card Holders who expatriated after June 17, 2008, and were considered "covered expatriates." Ever since the release of the HEART Act in 2008, U.S. citizens around the world have been waiting for the IRS to release the regulations for Code Section 2801, and on September 9, 2015, they finally did.
The basis of Code Section 2801 is unusual for the Internal Revenue Code, because for the first time the gift and estate tax is being directly imposed on the person receiving the gift.
The regulations drafted by the IRS propose to apply this tax retroactively to any gifts received after June 17, 2008. Therefore the gift would be taxed at the highest gift or estate tax rate in effect for the calendar year in which the gift was received. For 2015, this would be 40%.
The tax will apply to gifts received from a covered expatriate regardless of whether or not the expatriate owned the property at the time of the time of their expatriation. Gifts of property acquired after the covered expatriate had already ceased to be a U.S. citizen are taxed as well.
However, the IRS has provided exceptions to these rules as follows:
- Gifts or bequests that are below the annual gift tax exclusion (i.e., $14,000 for 2015).
- Charitable donations.
- Gifts or bequests to a covered expatriate's U.S. citizen spouse if it would have qualified for gift or estate tax marital deduction had they not expatriated.
It should be noted that a domestic trust that receives a gift or bequest from a covered expatriate is liable for payment of the Section 2801 tax. Beneficiaries that receive distributions from foreign trusts that were funded by a covered expatriate are subject to the tax as well.
The IRS will be placing the compliance burden on the recipient to determine if this tax applies to them. Therefore, the recipient will have to determine if the person was a covered expatriate. The IRS is proposing that with the signed consent of the expatriate, the IRS will be able to disclose certain return information of the expatriate to the recipient of the gift in order to help them to make the determination of whether or not the individual was a covered expatriate. If the expatriate does not consent, then the recipient will have to presume that each gift is subject to the tax. The IRS has indicated that one can "rebut" this presumption but has not indicated how to go about doing so.
The IRS will be releasing a new form, Form 708 for the purpose of reporting the covered gifts. It will still be some time before the regulations are finalized and Form 708, along with the due dates for filing and submitting the tax are released. Whatever the final regulations are, they will apply to gifts that are received now, so the U.S. tax implications should be considered.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
