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
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
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
Gifts or bequests that are below the annual gift tax exclusion
(i.e., $14,000 for 2015).
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.
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