What is a Gift Tax?
A gift tax is a federal tax of up to 40%, tacked on to a transfer of property by a person who,
either receives nothing, or less than the full value of the property in return. An important feature
of the gift tax is that it applies even if the person giving the gift (the donor) does not intend for
the transfer to be a gift. In other words, intent to give a gift is irrelevant when it comes to the gift
tax. The following sections discuss which transfers do—and do not—offset the gift tax,
specifically for foreign nationals who are non-residents and non-citizens of the United States.
Who Pays the Gift Tax?
Most commonly, the donor of a gift is the person responsible for paying the gift tax. In certain
situations, individuals may arrange for the person receiving the gift (the donee) to pay the tax,
subject to the donee’s agreement to do so. As this second option is less common, it is
recommended to speak with a tax professional if you are thinking of choosing this payment
Which Transfers Offset the Gift Tax?
For nonresidents of the United States who are not United States citizens, the gift tax still applies
to certain transfers of property located in the United States. The gift tax applies to physical or
tangible U.S. assets. As intent does not matter, it is important to be aware of what property can
be subject to gift taxes. For example, if you transfer your real property to another individual, and
you do not receive, in return, full consideration of the property’s fair market value, you have
made a gift in the eyes of the IRS. Moreover, if you make a loan with reduced or no interest, you
have made a gift in the eyes of the IRS. In sum, any transfer of real, tangible property that is
located in the United States, triggers a taxable event, subject to gift taxes, when the property is
sold for less than fair market value.
Which Transfers do not Offset the Gift Tax?
On the other hand, per IRC § 2501(a)(2), certain property is not subject to the gift tax—namely,
property that is intangible. Per the Internal Revenue Code, such intangible property includes,
among other things: stock in United States corporations, tuition or medical expenses paid on
another person’s behalf, gifts to a spouse who is a citizen of the United States, gifts to a political
organization, and gifts to certain charities. Important thing to note is that gifts to charities or
foundations must be for use within the United States.
As information regarding the gift tax may be complicated, it is recommended to consult with an
attorney and/or tax professional with any questions regarding gifts, the gift tax, or related
matters. Further information can also be found on the IRS website.