The IRS has issued final regulations (T.D. 10027) detailing how U.S. citizens, residents, and certain trusts must report and pay taxes on gifts and bequests received from covered expatriates. These new rules take effect on January 1, 2025, requiring affected recipients to file Form 708 to report and pay any applicable tax.

Under the final regulations, a 40% tax applies to covered gifts and bequests received from covered expatriates, though a credit is available for foreign gift and estate taxes paid. A covered expatriate is defined as an individual who relinquished U.S. citizenship or residency and meets specific income, net worth, or tax compliance criteria. The regulations clarify that the tax applies only to gifts and bequests received on or after January 1, 2025, despite previous uncertainty regarding retroactive enforcement.

Sec. 877A(g)(1) defines a covered expatriate as an individual who expatriates on or after June 17, 2008, and on the expatriation date: (1) has an average annual net income tax liability for the previous five tax years greater than $124,000 (indexed for inflation); (2) has a net worth of at least $2 million; and (3) fails to certify they complied with all U.S. tax obligations for the previous five tax years.

U.S. recipients, including individuals and domestic trusts, bear the responsibility of determining whether a donor is a covered expatriate and whether the transfer qualifies as a covered gift or bequest. If the transferor’s status is unclear, recipients may need to take proactive steps to confirm their tax obligations. Certain transfers, such as those made to spouses or charities, as well as qualified disclaimers, may be excluded from the tax.

Given the complexities of these new regulations, recipients of foreign gifts or bequests should review their potential exposure, coordinate with tax advisors to gather the necessary information, and prepare for Form 708 filing requirements.

For further guidance, consult a tax professional or visit the IRS website.