IRC 2801: The Tax on Gifts From Covered Expatriates

Internal Revenue Code Section 2801 establishes a tax on certain gifts and bequests received from individuals who have renounced their U.S. citizenship or terminated their long-term residency. This tax serves as a backstop to the U.S. transfer tax system, as non-U.S. persons are not subject to U.S. gift or estate tax on transfers of foreign property. A primary feature of this regulation is that the tax liability falls upon the U.S. recipient of the property, not the expatriate. The rules apply to transfers from individuals who expatriated on or after June 17, 2008. Final regulations for this tax apply to gifts and bequests received on or after January 1, 2025.

Identifying a Taxable Event

A taxable event under IRC Section 2801 occurs only when a specific set of conditions are met, involving the status of the donor, the recipient, and the nature of the transfer itself. The first condition relates to the donor, who must be a “covered expatriate.” An individual is classified as a covered expatriate if they renounced U.S. citizenship or terminated long-term permanent residency and meet any one of three tests outlined in IRC Section 877A. These rules apply to former citizens and former long-term residents, the latter being individuals who held a green card for at least eight of the 15 years preceding expatriation.

The net worth test is met if the individual’s net worth was $2 million or more on the date of expatriation. The income tax liability test applies if the individual’s average annual net income tax for the five years before expatriating exceeds an inflation-adjusted amount, which is $206,000 for 2025. The certification test is failed if the individual does not certify on Form 8854 that they have complied with all U.S. federal tax obligations for the five years preceding their expatriation.

The second condition for a taxable event is that the property must be received by a “U.S. recipient.” This category is broadly defined and includes U.S. citizens, U.S. residents, and domestic trusts. If a covered gift or bequest is made to a foreign trust, the tax is not imposed on the trust itself but on any subsequent distributions from that trust to a U.S. beneficiary.

Finally, the transfer itself must be a “covered gift or bequest.” This term encompasses any property acquired directly or indirectly by gift or at death from a covered expatriate. The rules apply regardless of whether the asset is situated in the U.S. or abroad, or whether it was acquired by the expatriate before or after they gave up their citizenship or residency. A transfer that would have qualified for a marital or charitable deduction under U.S. tax rules, had the donor been a U.S. person, is not considered a covered gift or bequest.

Calculating the Tax Amount

The starting point for the tax calculation is the fair market value of the property received during the calendar year. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, with neither being under any compulsion to act and both having reasonable knowledge of relevant facts.

From the total fair market value of all covered gifts and bequests received in a year, the recipient is allowed to subtract an annual exclusion amount. This reduction is tied to the annual gift tax exclusion amount under IRC Section 2503, which is adjusted for inflation. For the 2025 tax year, this exclusion amount is $19,000.

The net value of the covered gifts and bequests is then multiplied by the applicable tax rate. The law specifies that this rate is the highest marginal tax rate in effect for the federal estate tax for the year in which the gift or bequest is received, which is currently 40 percent.

A credit may be available to the recipient for any foreign gift or estate taxes they paid on the same transfer. This credit directly reduces the U.S. tax liability, preventing double taxation on the same property. For example, if a U.S. citizen receives a covered gift of $219,000, they would first subtract the $19,000 annual exclusion, leaving a taxable amount of $200,000. Applying the 40% tax rate results in a U.S. tax of $80,000. If the recipient also paid $10,000 in foreign gift tax on this transfer, they could use that as a credit to reduce their final U.S. tax liability to $70,000.

Required Information for Reporting

To comply with the reporting requirements for receiving a covered gift or bequest, the U.S. recipient must file Form 708, United States Return of Tax for Gifts and Bequests From Expatriates. The recipient will need to provide their own personal details, including their full name, address, and taxpayer identification number (TIN).

The form also requires specific information about the covered expatriate who made the transfer. This includes the expatriate’s full name and, if known, their TIN. The recipient must also report the date the gift was made or the date of the decedent’s death for a bequest. A detailed description of the property received is necessary, along with its fair market value on the date of the transfer.

The official and most current version of Form 708 and its accompanying instructions should always be obtained directly from the Internal Revenue Service (IRS) website.

Filing and Payment Process

The filing deadline for Form 708 is the 15th day of the 18th month following the end of the calendar year in which the covered gift or bequest was received.

The completed Form 708 must be mailed to the specific address designated by the IRS in the form’s instructions. It is best to check the most recent instructions for the correct mailing address, as these can change.

Payment of the tax liability calculated on Form 708 can be made through several methods. One option is using the IRS Direct Pay system on the IRS website, which allows for direct electronic withdrawal from a bank account. Taxpayers may also be able to pay via debit card, credit card, or digital wallet, though third-party processing fees may apply.

For those who prefer to pay by mail, a check or money order can be sent along with the Form 708. The payment should be made out to the “U.S. Treasury.” To ensure the payment is applied correctly, the recipient should write their name, address, taxpayer identification number, the tax year, and “Form 708” on the front of the check or money order.