U.S. Tax On Gifts And Bequests From Expatriates

Tax News You Can Use | For Professional Advisors

Cyrus Commissariat, Associate Wealth Advisor
Jane Ditelberg, Director of Tax Planning

July 7, 2025

Earlier this year, Tax News You Can Use published an article on the U.S. exit tax, or expatriation tax, that the tax code imposes on an individual who renounces their U.S. citizenship or gives up their green card. The goal of the exit tax is to prevent taxpayers from avoiding U.S. deferred income taxes on their assets by expatriating. The exit tax applies to capital gains tax and tax-deferred accounts such as retirement accounts.

However, the U.S. is also concerned about the estate and gift tax that a taxpayer could avoid by expatriating. To recover some of that tax when the assets are given or bequeathed by an expatriate to a U.S. taxpayer, Congress adopted Section 2801 in 2008. Section 2801 imposes a tax on a U.S. recipient of a gift or bequest from a covered expat after expatriation. It took the IRS 17 years to finalize regulations addressing when U.S recipients receive such gifts and bequests from covered expats. U.S. Treasury finalized these regulations this year, and they apply to all covered gifts and covered bequests made after January 1, 2025 by individuals who expatriated after June 17, 2008.

The recipient of a covered gift or covered bequest is responsible for paying Section 2801 tax. This differs from the tax regime applicable to gifts and bequests made by American citizens and residents, where the transferor is responsible for paying the gift and estate tax. Practically, Section 2801 regulations impose a duty on the U.S. recipient to determine whether the gift or bequest they receive is a covered gift or bequest and whether the transferor is a covered expatriate. If both conditions hold, the recipient must report the transfer and pay the tax.

Who Is A Qualified U.S. Recipient?

The recipient of the gift or bequest must be a U.S. recipient in order to become subject to the Section 2801 tax. This is defined broadly to include not only U.S. citizens but also residents, domestic trusts, and foreign trusts that elect to be treated as a domestic trust for purposes of Section 2801. Foreign trusts that do not elect to be treated as domestic trusts are not considered U.S. recipients and therefore do not have to pay this tax. However, the beneficiaries of such non-electing foreign trusts that are U.S. recipients will become subject to this tax when they receive a distribution from a foreign trust that is the recipient of a covered gift or bequest from a covered expatriate.

Who Is A Covered Expatriate?

Section 2801 uses the same definition of a covered expatriate used in the legislation authorizing the expatriation tax. A covered expatriate is a U.S. citizen who renounced their citizenship or a long-term U.S. resident who gave up their green card and terminated U.S. residency who also:

• Had a net worth on the date of expatriation or termination of residency of $2 million or more;
• Had had an average annual net income tax for the five years preceding expatriation exceeding a statutory limit, which is indexed for inflation. For 2025, that income tax threshold is $206,000; or
• Did not certify on IRS Form 8854 that they complied with all U.S. federal tax obligations for the five years preceding expatriation.

An expatriate is not a covered expatriate for purposes of Section 2801 during any period in which that individual is subject to estate and gift tax as a U.S. citizen or resident.

The recipient must determine if the transferor is a covered expatriate, which may prove to be challenging. Section 2801 tax is only due on transfers made after January 1, 2025, though the tax does apply to transfers from all taxpayers who expatriated after June 17, 2008, when Congress created this new tax regime for covered expatriates. The IRS does not maintain a list of covered expatriates, though it does publish a quarterly list of expatriates that may be a good starting point to determine if the donor or decedent expatriated. The donor may authorize the IRS to share information about the donor with the recipient to help them, but the donor may also refuse to permit this. If the donor refuses, this creates a rebuttable presumption that the donor is a covered expatriate. The difficulty in determining the status of the transferor is reflected in the longer filing time, and doing so will require diligence on the part of the taxpayer.

What Counts As A Covered Gift Or Bequest?

A covered gift is any property that a covered U.S. recipient receives as a gift from a covered expatriate, regardless of the location of the property or whether the property was acquired before or after expatriation. This capacious definition covers some transfers that are not gifts when made by a U.S. resident taxpayer, such as those that qualify for the annual gift exclusion and the educational and medical expense exemption. However, certain transfers that are favored under U.S. gift tax rules qualify for exemption under Section 2801, such as transfers between spouses that would have qualified for the marital deduction if the donor were a U.S. person and transfers to charities that would qualify for the charitable tax deduction.

A covered bequest is defined as any property received by reason of the death of a covered expatriate, regardless of the location of the property or if the property was acquired before expatriation. Basically, if the covered expatriate would have included the property in their gross estate had they been a U.S. citizen or resident before death, then a transfer of such property to a U.S. recipient would be a covered bequest.

How Does A Taxpayer Report The Transfer And Calculate The Tax?

Under the regulations, taxpayers report transfers subject to 2801 by filing an IRS Form 708, which does not yet exist. The regulations direct the IRS to finalize and release Form 708, which will include instructions for calculating the tax on covered gifts and bequests. The tax calculation involves determining the total value of all covered gifts and bequests received by the individual from all covered expatriates in the individual’s tax year. The annual per-donee exclusion amount, currently $19,000, is subtracted from the value of the covered gifts and bequests, and any excess is multiplied by the highest estate tax rate, which is currently 40%. The amount is then further reduced by any gift or estate tax paid to a foreign country. The value of the covered gifts and covered bequests received is the fair market value of each item on the date that it was received.

A taxpayer must file Form 708 every year in which they receive a covered gift or bequest. However, if the sum of these transfers is less than the annual exclusion, which is $19,000 for 2025, then it is not necessary to file a return. The deadline to file is before the fifteenth day of the eighteenth calendar month following the close of the calendar year in which the covered gift or bequest was received. This is considerably longer than the standard April 15 filing deadline for a Form 709 reporting gifts made by a U.S. taxpayer, or even the nine-month due date for estate tax returns for U.S. taxpayer decedents. A taxpayer may request an extension of time to file, but this does not extend the due date for the return.

If the taxpayer reasonably reaches the conclusion that the gift or bequest they have received is not a covered gift or covered bequest but they want the extra assurance of starting the clock on the statute of limitations, they may file a protective Form 708.

All documents and vouchers used to fill out Form 708 must be retained and made available for IRS review if requested. This is the same open-ended standard articulated for retaining records for U.S. estate and gift tax returns.

Does Paying This Tax Increase Basis In The Received Property?

No, paying Section 2801 tax does not increase one’s basis in the received property. Only taxes that are paid in a trade, business or an income producing activity and that are connected with the receipt of property increase one’s basis. This tax cannot be attributed to a trade, business, or income-producing activity.

Example:

Nathan inherits $250,000 from his late aunt, Nancy, on August 2, 2025. Nancy renounced her citizenship on June 3, 2009 and has been living in South Africa since then. Nathan does not receive any other covered gifts or covered bequests in 2025. Does he owe Section 2801 tax and if so, how much?

Nathan must determine if Nancy is a covered expatriate. To determine his aunt’s status, Nathan can request her tax return for 2009. If Nancy was a covered expatriate, then she should have paid the exit tax in 2009. Nathan may have the right to request these returns from the IRS, though the process for this is still being ironed out. It would be easier to have Nancy’s executor request the tax return. Further, Nathan should inquire about the estate taxes paid to South African authorities from Nancy’s estate. Upon receiving the requested return, Nathan sees that Nancy did pay the exit tax in 2009, and therefore Nancy was a covered expatriate.

The next step is to determine if the $250,000 bequest is a covered bequest. Like most bequests, this does indeed qualify as a covered bequest. Nathan has acquired the property by reason of Nancy’s death, and Nancy would have included the $250,000 in her gross estate for U.S. estate tax purposes if she had retained her American citizenship.

To calculate the tax, Nathan will add the value of the covered gifts and covered bequests that he has received in 2025, which total $250,000. He will then subtract the annual per-donee exclusion of $19,000, which nets $231,000. This excess is then multiplied by the highest estate tax rate currently in effect (40%), which equals $92,400. Nancy’s executor indicates that no estate taxes were paid to South Africa upon Nancy’s death, and therefore Nathan cannot receive any credit for foreign taxes paid. Nathan’s Section 2801 tax liability is therefore $92,400. This tax and Nathan’s Form 708 are due before the fifteenth day of the eighteenth calendar month following the close of the calendar year in which he received the property, so it is due before June 15, 2027.