Do I Pay Tax on Gift Money From Parents Overseas?

Receiving financial support from parents living overseas often raises questions about United States tax obligations. International money transfers, even between family members, can introduce specific reporting requirements under U.S. tax law. This article clarifies the U.S. tax rules and obligations for recipients of gifts from foreign parents.

Recipient’s Tax Obligation

In the United States, a recipient of a gift, whether from a domestic or foreign source, generally does not pay income tax on the amount received. The fundamental principle of U.S. gift tax law places the tax burden on the donor, not the person receiving the gift. This means that if your parents overseas send you money, you typically will not incur an income tax liability simply by receiving these funds.

When the donor is a foreign person residing outside the United States, they are usually not subject to U.S. gift tax laws, especially concerning gifts of foreign property. The Internal Revenue Service (IRS) generally lacks jurisdiction to impose gift tax on individuals who are not U.S. citizens or residents and whose gifts do not involve U.S.-situated property.

It is important to distinguish between the gift itself and any income that gift might generate. While the gift money itself is not taxable income to the recipient, any earnings or income derived from the gifted assets after they are received, such as interest from a savings account or dividends from investments, would be subject to U.S. income tax rules. The original gift remains untaxed, but its subsequent earnings fall under standard income taxation.

Reporting Requirements for Foreign Gifts

While a U.S. recipient does not typically owe income tax on a gift from parents overseas, specific information reporting requirements exist for large gifts from foreign persons. The IRS requires U.S. persons to report these gifts for informational purposes, allowing the agency to track significant foreign transfers.

You must report the gift if the aggregate amount received from a nonresident alien individual or a foreign estate exceeds $100,000 during the tax year. For gifts from foreign corporations or foreign partnerships, reporting is required if the aggregate amount from all such entities exceeds $19,570 for 2024. Gifts from related parties must be aggregated to determine if these thresholds are met.

This reporting is done on IRS Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” Filing this form provides the IRS with necessary information about the source and amount of the foreign gift. Failing to file Form 3520 when required, or providing incomplete or inaccurate information, can lead to substantial penalties.

Information Needed for Reporting

To accurately fulfill the reporting requirement on Form 3520, a U.S. recipient will need to gather specific details from their parents overseas, assuming the reporting threshold has been met. The information includes the full name and address of the foreign donor.

It is also necessary to obtain their foreign tax identification number, if such a number exists and is available. The exact date the gift was received, along with its fair market value on that specific date, must be documented. You should also identify the type of asset received, whether it was cash, property, securities, or other assets.

For non-cash gifts, determining the fair market value can involve obtaining a qualified appraisal, especially for high-value assets like real estate or unique collectibles. The IRS defines fair market value as the price at which property would change hands between a willing buyer and a willing seller, with neither being compelled to buy or sell and both having reasonable knowledge of relevant facts.

How to Report Foreign Gifts

Once necessary information has been gathered, the next step involves submitting Form 3520. This form is an information return, reporting data to the IRS without calculating a tax liability. It must be filed separately from your annual income tax return, Form 1040.

The due date for Form 3520 is the 15th day of the fourth month following the end of your tax year, typically April 15th. If you receive an extension to file your individual income tax return, the due date for Form 3520 is also extended, usually to October 15th.

The completed Form 3520 should be mailed to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409. While some forms can be e-filed, Form 3520 generally requires a paper submission.

Failure to timely or accurately report large foreign gifts can result in significant penalties. Penalties may be assessed as 5% of the gift’s value per month, capped at 25%, or the greater of $10,000 or 35% of the gross reportable amount. Penalties may be abated if the taxpayer can demonstrate reasonable cause. For complex situations or uncertainties regarding reporting obligations, consulting a qualified tax professional is advisable.