In the United States, those who receive gifts are not required to pay any gift taxes. The burden of paying the gift tax falls on the gift-giver. The same is true for those who receive testamentary gifts. The fact that the gift is from a foreign person is irrelevant.

Although gifts or inheritances from foreign persons are not subject to income tax or an inheritance tax, if the gifts of money or other property are valued over certain amounts, the recipient the gifts must report them to the IRS.

The IRS requires taxpayers to report:

1. Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate); or
2. Gifts valued at more than $13,258 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).

Additionally, gifts from related parties must be combined. For example, if you receive a gift of $60,000 from your mom and $60,000 from your dad, who are Mexican citizens living in Mexico, you must report the gift because the combined gift totals more than $100,000.

If you receive a gift or inheritance that exceeds these thresholds, you will be required to file Form 3520 with your tax return for the year that the gift was made.

Failing to file Form 3520 accurately or on time may subject you to penalties of 5 percent of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25 percent).

For more information, visit the IRS’s website by clicking here.

Photo courtesy of and copyright Free Range Stock, www.freerangestock.com.

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Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law on December 17 of last year, individuals can pass up to $5 million free of any estate tax liability.

Additionally, can pass up to $10 million free of estate tax because a deceased spouse can transfer any unused tax exemption to his surviving spouse, a concept tax professionals refer to as “portability.”

If Congress doesn’t act before December 31, the new law will expire, which means portability could disappear with it. However, there are signs that portability may stick around since President Obama’s proposed budget for fiscal 2012 would make portability permanent. Additionally, politicians on both sides of the political spectrum support portability.

Attorney and Journalist Deborah L. Jacobs recently wrote an article for Forbes explaining how portability should factor into estate planning at different stages. Below is a summary of her suggestions:

Updating an Estate Plan

Spouses can pass an unlimited amount of assets to each other without any estate tax liability. This is called the unlimited marital deduction. Before portability couples were required to create bypass trusts to preserve the deceased spouse’s exemption amount. Otherwise, all assets left to the surviving spouse would be included his or her estate, and estate taxes would be due on any assets that exceeded the exemption amount.

Portability eliminates the need to use a bypass trust solely to preserve a deceased spouse’s federal exclusion. There are other reasons to use bypass trusts, such as sheltering appreciating assets or preserving a state estate tax exemption. But in many cases, if a couple’s combined assets amount to less than the amount both spouses could pass without an estate tax, they may not be necessary.

Making Large Lifetime Gifts

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 also reunifies the federal estate and gift taxes for gifts made after December 31, 2010. That means couples can pass more money to their children during their lifetimes. However, this reduces the amount that they can pass free of estate tax upon their death.

At a Spouse’s Death

In order to pass a deceased spouse’s unused tax exemption, the deceased spouse’s executor must file an estate tax return within nine months after the death of the first spouse. Otherwise, the surviving spouse loses their right to the unused exemption. Even if the couple isn’t wealthy, it’s a good idea to claim it because of wealth that may be acquired in the future.

At a Remarriage

It’s important to remember that a surviving spouse only gets the unused exemption of the most recent spouse to die. If he or she remarries someone that has used up his or her estate tax exemption and later dies, the surviving spouse is left with only his or her own exemption. The first spouse’s unused exemption is gone.

For more information on situations when bypass trusts are helpful despite portability, read: Does Portability Make Bypass Trusts Obsolete?

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The short answer to the question is no. Before 1995, Texas collected a separate inheritance tax, called a “pick-up tax.” The tax did not increase the total amount of estate tax paid upon death. Rather, a portion of the federal estate tax, equal to the allowable state death tax credit on the federal estate tax return, was deducted from amount due to the federal government and paid to Texas.

However, under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the state death tax credit was phased out starting on January 1, 2005. In response, some states changed their laws to “decouple” from federal system and imposed their own inheritance taxes to compensate for the decline in revenue. Texas did not decouple.

The federal estate tax and the pick-up tax were scheduled to return on January 1, 2011 with the expiration of EGTRRA. However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 , which repealed EGTRRA, did not reinstate the pick-up tax. As a result, no state inheritance tax is due on estates with a date of death on or after January 1, 2005.

The new law is scheduled to expire on December 31, 2012. If no new law is passed, the pick-up tax, and the state inheritance tax, will return on January 1, 2013.

For more information, visit the Texas Comptroller of Public Accounts website.

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It came down to the wire, but on December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law. If Congress had not acted before the end of the year, estates valued at over $1 million would have faced estate taxes of up to 55 percent starting on January 1 of this year.

The new law sets the estate tax rate at 35 percent for individual estates valued at over $5 million. It also:

1. Sets a $5 million generation-skipping transfer tax exemption and a zero percent rate for those dying in 2010. The generation-skipping tax rate for those dying after December 31, 2010 is 35 percent.
2. Reunifies the federal estate and gift taxes for gifts made after December 31, 2010 so that the gift tax exemption and maximum tax rate is equal to the estate tax exemption and maximum estate tax rate.
3. Allows portability of the estate tax exemption between spouses. Any part of the estate tax exemption that has not been used by a predeceased spouse who dies after December 31, 2010 can be transferred to the surviving spouse for use in addition to the surviving spouse’s exemption.
4. Applies retroactively to January 1, 2010, but allows an executor of an estate of a person who died in 2010 to choose no estate tax and modified carryover basis rules that were in effect for 2010.

The new law is temporary and is set to expire on December 31, 2013, which means that if Congress doesn’t pass new legislation before then, we’ll find ourselves facing the same uncertainty we did just a few weeks ago.

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Last night, members of the House of Representatives approved the agreement reached between Republicans and President Obama, which temporarily extends Bush-era tax cuts for all Americans and sets the estate tax exemption amount at $5 million and the tax rate at 35 percent for individuals passing more than that to their heirs. The bill now heads to President Obama for his signature.

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