Non-resident aliens of the United States frequently make gifts of money to a child or spouse who is a citizen or resident of the United States (hereinafter referred to as a “US child” or “US spouse”), but few of those non-resident aliens fully understand the United States federal gift tax and income tax issues associated with making gifts to a US child or US spouse. In fact, many of them unintentionally make taxable gifts or unknowingly convert what would have been a tax-free gift to taxable income. 

Gifts of intangible property made by a non-resident alien to any person are not subject to United States federal gift tax even if the intangible property is situated within the United States. Non-resident aliens are, however, subject to United States federal gift tax on gifts of tangible property situated within the United States, except to the extent that the federal gift tax annual exclusion and any deductions are applicable.

The amount of the federal gift tax annual exclusion for gifts made during 2012 is $13,000 for gifts to any person, except that the federal gift tax annual exclusion is $139,000 for gifts made to a spouse who is not a citizen of the United States. Gifts made to a spouse who is a citizen of the United States are subject to the $13,000 gift tax annual exclusion and any excess could be offset by the unlimited gift tax marital deduction.

It is clear that gifts made during a particular calendar year by a non-resident alien to his US child or US spouse of tangible property situated within the United States are subject to United States federal gift tax to the extent that the fair market value of the aggregate amount of gifts received during that calendar year exceeds the amount of the gift tax annual exclusion, or $13,000 for gifts made during 2012.

What is not entirely clear, however, is whether money is tangible property or intangible property for this purpose, and sometimes it is not even clear whether a transfer of money should be treated as a gift in the first place. These issues are illustrated below by pointing out mistakes frequently made by non-resident aliens when making gifts of money to a US child or US spouse.

The most common mistake made by non-resident aliens when making a gift of money to a US child or US spouse is transferring money from a financial account owned by a foreign corporation or foreign partnership rather than transferring money from a financial account owned by the non-resident alien personally.

A foreign corporation or foreign partnership is normally any corporation or partnership that is not organised under the laws of any state within the United States or the District of Columbia and has not made an election with the Internal Revenue Service to be treated as a disregarded entity for United States federal tax purposes.

With certain exceptions (none of which typically applies), a purported gift from a foreign corporation or a foreign partnership to a United States person is oftentimes treated for United States federal tax purposes as taxable distribution from the entity to the US child or US spouse rather than a gift. To avoid this outcome, a non-resident alien should never make a gift to his US child or US spouse directly from a financial account owned by a foreign corporation or foreign partnership unless an exception applies that would definitively treat the transfer of money as a tax-free gift.

The second most common mistake made by non-resident aliens when making a gift of money to a US child or US spouse is transferring money that is located within the United States. Although not free from doubt, case law and guidance from the Internal Revenue Service suggests that money is tangible property.

Assuming that is the case, then the transfer of money by a non-resident alien would be subject to United States federal gift tax if such money is situated within the United States. Other IRS guidance suggests that money transferred by a check which is drawn on a personal financial account located outside of the United States is a gift of money that is not situated within the United States.

For these reasons and others, a non-resident alien should make a gift of money to his US child or US spouse only from his personal financial account (titled solely in his personal name) that is located outside of the United States4. This suggested approach should not be interpreted to mean that a gift of money made from a personal financial account located within the United States is subject to United States federal gift tax.

Instead, it should be interpreted to mean that this suggested approach should be followed due to the uncertainty related to the classification of money located within the United States.

The third most common mistake made by non-resident aliens when making a gift of money to a US child or US spouse is transferring money that is intended to be used to purchase tangible property located within the United States, such as real estate or an automobile.

Approximately forty year ago, the United States Tax Court held that a gift of money intended to be used to purchase real estate located within the United States should be treated as an indirect taxable gift of real estate rather than a gift of money.

Although this case is very old, if a non-resident alien is making a gift of money to his US child or US spouse and such money may be used to purchase tangible property situated within the United States, steps should be taken to prevent a similar result.

For example, if a non-resident alien desires to make a gift to his US child or US spouse of valuable tangible property that is easily movable, such as jewellery or art, then the physical transfer of the property by the non-resident alien to his US child or US spouse should be completed outside of the United States.

A non-resident alien should plan carefully when making gifts of money to his US child or US spouse to ensure that such gifts are not subject to United States federal gift tax and that such gifts are not treated as taxable income.

If, however, the gift is to a spouse who is a citizen of the United States, it may not be necessary to plan to minimise United States federal gift tax because the unlimited gift tax marital deduction for gifts made to a spouse who is a citizen of the United States essentially cause such gifts to be gift tax-free if the deduction is applicable and properly claimed.