The Gift Tax: US Expat Exclusions & Exemptions Explained

Gift Taxes US Expat Exclusions & Exemptions Explained

It may be a toy for a niece you’re doting on. A handbag for a special someone. Or a gift certificate for your child. 

And other times, it may be a ranch in Texas or a beach bungalow in Hawaii that you plan to gift to your foreign spouse. Whatever it is, that happy season of gift-giving is here with us again.  

Even as you plan to give that gift, here’s something you should know. 

Your gift may come with an obligation to file a gift tax return. In certain situations, you may need to write a check to the Treasury. Yes, as payment of gift tax. 

Fortunately, you can use certain exclusions and exemptions to avoid paying gift tax.

In this article, we show you what gift taxes are and the important exclusions and exemptions you can use to avoid paying the gift tax altogether.

What is the gift tax?

The IRS defines the gift tax as “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” 

Therefore, this is the only factor to establish whether you’re liable for gift taxes. 

How much are you, the donor (the person giving the property), receiving compared to the actual full value of the property you’re giving away?

Let’s say there’s a Texas-based consultant working in Canada. Let’s call him Barry. Barry has a ranch-style home in Fort Worth, Texas, with a fair market value of $420,000. 

❓ Now, if Barry transfers this home to his Swedish wife for $200,000, will the IRS consider this a gift?

To determine whether the IRS will consider this a gift, we’ll need to answer two simple questions:

  • – How much is Barry receiving in return?
  • – Is the amount Barry receives equal to or less than $420,000?

It doesn’t matter whether Barry calls this a “donation,” an “award,” or a “present.”

As you can see, while Barry is certainly receiving something in return, he’s only receiving $200,000. 

Unfortunately, $200,000 is less than $420,000, the market value of the property that Barry transferred. The IRS will consider this a gift for tax purposes.

And, of course, for gift tax purposes, “property” includes money. 

If Barry sends his 25-year-old son $30,000 to help him with his student loans, the IRS will deem this a gift, even though it’s cash and not property in the sense that many Americans understand “property.” 

But there’s another crucial element.

❗ According to the IRS, the gift tax doesn’t depend on the donor’s intention. It will apply whether you, as the donor, intend it to be a gift or not.

So let’s say that Barry had a contract with his friend Oliver, an Ohio-based architect, and, under the terms of this contract, Oliver designs Barry a craftsman-style house for $40,000. 

Let’s add that as part of this contract, Barry wouldn’t need to pay Oliver in cash. Instead, he’ll give Oliver his 2022 Tesla Model 3 valued at $70,000.

❓ Will the IRS treat this Tesla Model 3 as a gift?

Yes. 

Here’s the reason. 

Even though this looks more like a barter transaction and Barry doesn’t intend this to be a gift, this exchange has led to a situation where Barry has received less ($40,000) than what he has given away ($70,000).

✅ But wait. As with many other taxes, the gift tax comes with certain IRS-stipulated thresholds. 

You may not need to pay gift tax for all the situations we’ve highlighted above—even though they meet the definition of a gift.

What different thresholds exist?

If you’re planning to make gifts to your spouse or any person, there are two types of gift tax exclusion thresholds you should know.

  • – Annual gift tax exclusion
  • – Lifetime gift tax exemption

The annual gift tax exclusion

Suppose Barry gifts his Swedish wife $15,000 in cash as a Christmas gift. Will he need to fill out the gift tax return or pay the gift tax?

❗ The answer is no. Barry won’t need to file the gift tax return or pay the gift tax.

According to the IRS, $15,000 is below what’s known as the annual gift tax exclusion threshold.

The annual gift tax exclusion is the amount you can give out as a gift—and not file tax returns related to the gift—or pay any associated gift tax.  

Gift tax limit 2022 & 2023

As of 2022 tax year, the annual gift tax exclusion amount is $16,000. 

However, the IRS continuously adjusts the annual gift tax exclusion threshold for inflation. As a result, the annual gift tax exclusion for the 2023 tax year will go up $1,000 to $17,000.

Let’s try another scenario.

Suppose Barry has three children, all adults, and he gives them $30,000 in equal parts of $10,000 each. Will he file the gift tax return or pay gift taxes?

Surprisingly, the answer is still “No.” And here’s the reason.

The annual gift tax exclusion threshold is recipient-based, not donor-based

It means Barry doesn’t have to file the gift tax return or pay associated gift tax—if the amount he gives out as a gift to a particular recipient—is below the annual gift tax exclusion threshold.

Now, while the annual gift tax exclusion threshold is $16,000, gifts made to foreign spouses are an exception U.S. expats will be thrilled to learn about.

The tax implications of gifts to non-citizen spouses

While you don’t have to file the gift tax return for gifts less than $16,000, the threshold for filing the gift tax return—for gifts made to foreign spouses—is $164,000 in the 2022 tax year.

There’s even better news, especially for U.S. expats living abroad. 

The threshold for giving a gift to a foreign spouse without filing a tax return will jump to $175,000 in the 2023 tax year.

So if you’re an expat, and you buy for your foreign spouse a house in Mesa, Arizona, for $150,000, you’ll not need to file the gift tax return. 

And if you don’t have to file the gift tax return, it generally means you don’t have to pay the gift tax.

The only time you need to think of the IRS is if you have gifted your foreign spouse property valued at more than $164,000 ($175,000 in 2023).

Yet, even in that case, you’ll only need to file your gift tax return. You’ll still not need to pay any gift taxes unless you’ve exhausted what’s known as the lifetime gift tax exemption.

Lifetime gift tax exemption

Now, let’s suppose Barry gifts his Swedish spouse his Fort Worth-based property valued at $420,000. Will Barry need to file the gift tax return or pay the gift tax?

❗ For filing the gift tax return, “Yes.” 

Property gifts made to foreign spouses have a reporting threshold of $164,000. 

In other non-spouse-related situations, the reporting threshold is $16,000. Therefore, Barry will need to file Form 709.

But whether Barry will need to pay the gift tax, well, not quite. And that’s where the lifetime gift tax exemption comes in.

The lifetime gift tax exemption is the amount you can give during your entire lifetime or at your death, and not pay gift taxes.

As of 2022, the lifetime gift tax exemption is $12,060,000. However, this amount will climb to $12,920,000 in 2023. 

As you can see, the $420,000 that Barry gifted his Swedish spouse in 2022 is still way below $12,060,000, the amount above which he will need to pay gift tax.

So this is what Barry will need to do if he donates $420,000 to his Swedish wife.

  • He will set off the first $164,000 against the annual exclusion limit.
  • He will set off the remaining $256,000 ($420,000 – $164,000) against the lifetime exclusion limit of $12,060,000.

Here’s the effect. Barry will still have enough legroom to be philanthropic. 

Assuming he has donated nothing up to this point, he’ll still be able to donate up to $11,804,000 ($12,060,000 – $256,000) in his lifetime.

Remember, for gifts to non-spouses, the filing and reporting threshold is $16,000 for 2022.

It means if Barry gives his son $18,000 in cash, he won’t pay gift tax. He can still set off $16,000 against the annual gift tax exclusion and the remaining $2,000 against his lifetime gift tax exemption.

Gifts are generally non-tax events. 

For most Americans, including expats abroad, what to monitor will be your gift tax filing requirements, not tax payments. 

Still, if you need help with gifts and gift taxes, just contact our expert expat CPAs today. We’re more than willing to help.

Register now, and your Bright!Tax CPA will be in touch right away to guide you through the next steps.

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