Overview
The IRS has introduced Form 708, which officially enacts Section 2801. This section imposes a transfer tax on certain gifts and inheritances from 'covered expatriates' starting 1 January 2025. While the law has been around since 2008, Form 708 is the first standardized way to report and pay this tax. Unlike traditional gift or estate taxes, this tax is the responsibility of the U.S. recipient, not the donor, and is set at 40%.
Form 708 is relevant when a U.S. person receives a gift or inheritance from a former U.S. citizen or long-term resident who met specific net worth, tax liability, or compliance criteria at the time of expatriation. With a clear filing process now available, this change enhances enforcement visibility and underscores the importance of early identification of potential exposure in cross-border and private wealth planning.
Form 708 must be filed by the 15th day of the 18th month following the end of the calendar year in which the covered gift or bequest was received. You can request more time to file Form 708 by submitting Form 7004.
Definitions
Section 2801 tax applies to the 'U.S. recipient' who receives a 'covered gift' or 'covered bequest' from 'covered expatriates.'
- U.S. recipient: A U.S. citizen or resident (including domestic and electing foreign trusts) who receives a covered gift or bequest, directly or indirectly, during the year. This includes those receiving distributions from non-electing foreign trusts tied to covered gifts or bequests, as well as U.S. citizens or residents with interests in domestic entities that receive such gifts or bequests.
- Covered gift: Defined under the final regulations as any property, regardless of its location, that a recipient receives as a gift, either directly or indirectly, from a covered expatriate.
- Covered bequest: Refers to property acquired directly or indirectly due to the death of a covered expatriate. Covered bequests include property that would have been part of the covered expatriate's gross estate for federal estate tax purposes had the decedent been a U.S. citizen immediately prior to death. Additionally, covered gifts and bequests also include distributions from a non-electing foreign trust linked to covered gifts and bequests made to the trust after the HEART Act was enacted.
- Covered expatriate: Someone who expatriates after 16 June 2008 and meets one or more of these criteria: (1) average annual net income tax over $206,000 (2025) for the 5 years preceding expatriation, (2) net worth of $2 million or more, or (3) failure to certify compliance with all U.S. federal tax obligations for the 5 years preceding expatriation.
Key insights
- IRS Form 708 brings section 2801 to life, offering a way to report and pay taxes on gifts and bequests from covered expatriates, starting from 1 January 2025.
- It's up to the U.S. recipient to confirm if the donor or decedent is a covered expatriate and if the transfer is a covered gift or bequest.
- A tax at the highest federal estate tax rate (currently 40%) is levied on the U.S. recipient, with possible credits for foreign gift or estate taxes on the same transfer.
- U.S. citizens, residents, and certain domestic trusts must report any direct or indirect receipt of covered gifts and bequests from covered expatriates.
- Section 2801 tax covers both lifetime gifts and testamentary transfers, including some distributions from foreign trusts linked to covered gifts or bequests.
- U.S. recipients need to file Form 708 by the 15th day of the 18th month after the calendar year when the covered gift or bequest was received.
- There are limited exceptions, such as transfers to qualifying charities, transfers to spouses under certain conditions, and property passing through qualified disclaimers.
Our expertise
U.S. tax teams in Zurich and Geneva is dedicated to U.S. tax reporting and consulting for individuals with cross-border tax duties, offering custom solutions. We work with U.S. expatriates globally to ensure compliance and optimal tax positioning as they navigate the complexities of cross-border filing.
Let's connect
Reach out to us for an initial discussion. Discover how our tailored approach can meet your specific needs and enhance your tax position. Contact us today to explore how we can support you.
