The IRS issued final regulations (T.D. 10027) regarding taxpayers who must pay taxes on gifts or bequests that they receive from certain individuals who gave up their U.S. citizenship or residency.

The final regulations, issued Jan. 10, also provide guidance on the method for reporting and paying this tax. They follow up on proposed regulations (REG-112997-10) published in 2015 in the Federal Register. 

The final regulations implement Sec. 2801, which was added to the Code by the Heroes Earnings Assistance and Relief Tax Act of 2008, P.L. 110-245, to tax “covered gifts” and “covered bequests” a U.S. citizen or resident receives from a “covered expatriate.”

Sec. 2801 imposes a tax, at the highest applicable gift or estate tax rate, on any U.S. citizen or resident who receives a covered gift or bequest. A covered gift is defined as property acquired by a direct or indirect gift from a covered expatriate that generally would have been includible in the covered expatriate’s gross estate if they had been a U.S. citizen or resident at death.

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.

In response to comments on the proposed regulations, the final regulations revise several provisions, including one dealing with covered bequests, which now describes three categories of property in the definition of the term.

The final regulations also partially modify the definition of indirect acquisition of property and delete a requirement for exclusion from the Sec. 2801 tax of timely payment of tax on the covered expatriate’s gift or estate tax return.

The Sec. 2801 tax will be computed on Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates, on which a U.S. recipient will report covered gifts and covered bequests received during a calendar year.

Some of the final regulations are applicable on Jan. 1, 2025, while others are applicable on Jan. 14, 2025, the date of publication in the Federal Register.