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George Saenz, the Bankrate.com Tax Talk columnistReporting gifts from foreign family members

Dear Tax Talk,
If I receive multiple cash gifts from family outside the United States to help my wife and I buy a house, am I obligated to pay taxes on or file it with the IRS? Is there a limit on how much I can receive in one year? Thanks.
-- Joseph G.

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Dear Joseph,
A gift is never taxable as income whether the giver is a U.S. person or a foreigner. However, since some foreigners have taken advantage of this rule to avoid paying income taxes on disguised gifts, there are some reporting criteria.

For example, U.S. persons with foreign connections have restructured their holdings overseas to say that their family owns everything and that they get gifts from the overseas family. There are rules intended to prevent this recharacterization of income and also a requirement that U.S. persons report certain gifts from overseas.

The reporting threshold is broken down between gifts from business entities and gifts from individuals. The threshold is adjusted annually for inflation. If in 2006 you received more than $12,760 in gifts from a foreign business entity, you'll need to disclose that on Form 3520 Part IV.

If you received more than $100,000 from a foreign individual, you'll need to disclose that separately on the same form. Gifts from related individuals and entities are treated as one for purposes of the thresholds. For example, if you received $5,000 from foreign corporation X that is owned by nonresident individual Y who gave you $8,000, you'll need to disclose the $13,000 gift on line 55 of Part IV.  

If you fail to report the gifts, IRS can impose a penalty of 5 percent of the gift amount per month, up to a 25 percent maximum. Additionally the failure to report the amount as a gift can be detrimental to a taxpayer later asserting that defense upon an examination. That is, if you don't report it as a gift until you get examined, the IRS can deny you the gift treatment as a defense.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: Aug. 23, 2006
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