This post is part of a pair of article on gift estate taxes in the two countries for American expats living in France. The post on French gift taxes is linked here.

We’ve often found that gift taxes in the U.S. confuse people. How much can you give? To whom? And who pays the tax, anyway? If you have moved to France, you may be even more confused. France, too, has tax laws that touch on who, how much and when you can give gifts. And they are very different. In these two articles, we look at how gifts and taxes work in the two countries. We begin with U.S. gift tax laws here. For the article on French gift taxes, click here.

What is a gift?

First, we should note that both countries make a distinction between gifts given to qualified non-profit organizations (i.e. charities) and to anyone else. Both offer tax deductions within certain limits for charitable donations. But for our purposes in these articles, a “gift” is to a family member (though generally not a spouse), a friend, a stranger or an organization that is not qualified for the charitable deduction. Gifts can be cash. They can also be “in-kind,” which is to say, they can be anything from stock shares to furniture to a home. 

Who pays the gift tax?

This is probably the greatest source of confusion in the U.S. And why not? You would imagine that the person who receives the gift would be paying any tax. But actually, the gift tax is part of the rules on taxation of estates. If I give a gift of cash to someone, neither of us will pay a tax on it. But after my death, my estate might. That’s because when you die with an estate in the U.S., the IRS allows your estate to exclude a certain amount from the estate’s value for tax purposes. For anything over that amount, your estate will pay a tax before the remainder of your estate is handed out (tax-free) to your beneficiaries.

 Because the U.S. government does not want to see 98-year-olds handing out millions from their death beds to avoid estate taxes, the regulations say that gifts given during your life count against the amount of that estate tax exclusion. To make keeping track of this much simpler, the government overlooks all the small gifts we make during our lifetimes. So the gift tax exemption is, in fact, the amount that the IRS will overlook every year. For 2023, it stands at $17,000 for the year per person and per giver. If you hand someone $16,000 tomorrow, you don’t have to keep track of it. On the other hand, if you hand someone $18,000 in 2023, you need to file a form 709 with the IRS to let the know that you have used up $1,000 of your lifetime credit.

What are the exceptions?

There are some pretty important exceptions to the gift tax regulations. For instance, you can (generally) give as much as you want to your spouse. You can also pay for someone’s medical expenses or educational costs without it counting toward your lifetime credit – as long as you pay those expenses directly to the provider. This applies even to people who are not related to you in any way (medical and educational expenses paid for your child are not defined as gifts). You can also give to political organizations and of course, to charitable organizations, without worrying about the lifetime estate credit.

 How much does it matter?

At the moment the lifetime exclusion amount for the estate of someone in the U.S. stands at $12,920,000. If you are looking at that number and thinking, “it would take me more than one lifetime to give away that much” – you are not alone. For most of us making gifts outside of the gift tax exclusion from time to time will likely have no effect. But we do want to note two issues. the first is that filing the Form 709 often gets overlooked. And you can end up with an IRS enquiry just for missing it. The second is that we don’t know if or for how long the exemption will stay at those levels. It doubled in 2018 thanks to the Tax Cuts and Jobs Act, but that provision automatically ends (“sunsets”) in 2025. And given U.S. politics, who can say what happens next?

 So, how does this affect U.S. expats?

As you undoubtedly know, the U.S. does not give its citizens any breaks on bureaucracy for living abroad. So, you will still owe the IRS a Form 709 if you give a non-exempt gift. Aside from that,  you want to keep in mind that, depending on your circumstances, your estate might end up being in the U.S., where the lifetime exemption (whatever it is by then) could be an issue for your beneficiaries.

Watch out for “Foreign Gifts”

The IRS regulations have special provisions for “Foreign Gifts,” and they include substantial penalties if you fail to file. If any U.S. person receives a large gift from a foreign person or organization, you will need to report that to the IRS in Part IV of Form 3520. As a U.S. citizen, you are not a “foreign person.” You can still give gifts to your friends and family in the U.S. under the regular rules. But any foreign-registered business or trust giving the same gift will trigger the rule. At present, a U.S. person has to file if she/he receives more than $100,000 in gifts or inheritances from an individual during the year or more than $16,388 from a foreign corporation or partnership.

What about a gift tax deduction?

In the U.S., you never take a deduction from your taxes for regular gifts (as opposed to charitable donations, for instance). But there are certain gift deductions in France. To understand how gifts and taxes work here, read on.

Have more questions about gift taxes in the U.S. and France? Ask us in the comments section below.