If you received a gift or inheritance from someone who gave up U.S. citizenship or long-term residency, the IRC Section 2801 tax on gifts from covered expatriates hits you, the recipient, at a flat 40% on the value above an annual exclusion. The tax applies only if the person who gave you the property was a “covered expatriate” at the time of the transfer, and you report it on Form 708. Final regulations took effect on January 14, 2025, and the IRS released Form 708 with instructions dated December 2025, so the reporting system is now fully operational for the first time since the statute was enacted in 2008.
Was the Donor a Covered Expatriate
The tax only applies when the person who transferred property to you was a covered expatriate at the moment of the gift or death. That status comes from Section 877A, which has three independent tests. Failing any one of them is enough.
- Worldwide net worth of $2,000,000 or more on the date of expatriation. This figure is not indexed for inflation and covers all property, retirement accounts, and business interests.
- Average annual net income tax over the five years before expatriation exceeding an inflation-adjusted threshold. That threshold was $206,000 for 2025.
- Failure to certify on Form 8854, under penalty of perjury, five years of federal tax compliance before expatriation.
The certification test is the one that catches people by surprise. Someone with modest wealth and income who simply skipped Form 8854 becomes a covered expatriate by default, and every later gift or bequest they make to a U.S. person carries the 40% tax.
Figuring out whether the donor actually meets one of these tests is often the hardest part. If a living donor won’t authorize the IRS to release their relevant tax information, you can presume they are a covered expatriate and treat the gift accordingly. That protects you if you act in good faith, and it shifts the burden back to the donor to prove otherwise.
What Counts as a Covered Gift or Bequest
A covered gift is any property you receive, directly or indirectly, from a covered expatriate. A covered bequest is property you receive because of the death of someone who was a covered expatriate immediately before dying. Where the asset sits doesn’t matter. Real estate in London, cash in a Swiss account, and stock in a Tokyo brokerage all fall within Section 2801.
Indirect transfers count the same as direct ones. If a covered expatriate funds a foreign trust and that trust later distributes money to you, the distribution is treated as if the expatriate handed the assets over personally. The statute is written broadly to prevent routing wealth through intermediaries.
How Much You Owe
The tax rate is 40%, which matches the highest marginal estate tax rate under Section 2001(c). It applies to the fair market value of the property on the date you receive it.
For lifetime gifts, you get an annual exclusion equal to the per-donee gift tax exclusion under Section 2503(b). For 2026, that exclusion is $19,000. Only the excess is taxed. Receive a $519,000 covered gift and $500,000 is taxable, producing $200,000 of tax. The exclusion runs per donor per year, so gifts from two different covered expatriates each get their own $19,000 reduction. Bequests at death do not get this exclusion.
There is no lifetime exemption or unified credit that offsets the Section 2801 tax the way it does for ordinary estate and gift tax. Every dollar above the annual exclusion is taxed at 40%.
One offset exists. If a foreign country imposed its own gift or estate tax on the same transfer, your Section 2801 tax is reduced by that foreign tax. This keeps the property from being taxed twice on both sides of the border.
Paying the Section 2801 tax does not raise your income tax basis in the property. If you receive appreciated stock, pay the 40%, and later sell at a gain, you owe capital gains tax on the full appreciation with no basis step-up for what you already paid. The effective burden on a single asset can end up well above 40% once you sell.
Transfers That Are Exempt
Three categories of transfers from a covered expatriate are not covered gifts or bequests.
- Transfers already subject to U.S. gift or estate tax. If the covered expatriate reported the gift on a timely filed Form 709, or the property was included on a timely filed Form 706 and the tax was paid, the transfer is exempt. Late filings do not count.
- Transfers to a U.S. citizen spouse. A spouse who is a resident but not a citizen does not qualify.
- Charitable transfers that would qualify for a charitable deduction under the ordinary gift or estate tax rules.
Proving an exemption is your job. For transfers already taxed, get copies of the relevant Forms 706 or 709 showing timely filing and payment. Without documentation, the IRS can assess the full 40%.
Distributions From Trusts
Trusts are treated differently depending on whether they are domestic or foreign.
A domestic trust that receives a covered gift or bequest is treated as a U.S. citizen for Section 2801 purposes. The trust itself pays the tax, not the beneficiaries, and that payment does not create a taxable distribution under the generation-skipping transfer tax rules.
A foreign trust works the opposite way. When a covered expatriate transfers property to a foreign trust, no tax is imposed at the time of the transfer. The tax is triggered later, when distributions from the trust reach U.S. citizens or residents. Each distribution is taxed to the extent it is attributable to the original covered gift or bequest. If you are a U.S. beneficiary of a foreign trust funded by a covered expatriate, expect a 40% hit on the portion of any distribution traced back to that funding.
A foreign trust can elect to be treated as a domestic trust for Section 2801 purposes. Then the trust pays the tax directly instead of passing it through on every distribution, which can simplify things when there are multiple U.S. beneficiaries.
Filing Form 708
Form 708 is due on the 15th day of the 18th month after the close of the calendar year in which you received the covered gift or bequest. For transfers received during 2025, that puts the deadline at June 15, 2027. The long window exists because recipients often need time to determine whether the donor qualifies as a covered expatriate.
If you receive a gift or bequest from an expatriate and reasonably conclude it is not a covered transfer, you can file a protective Form 708 to start the statute of limitations running. The protective return has to be signed under penalties of perjury, explain your reasoning, and include a copy of Part III of Form 3520 reflecting the transfer. Filing protectively is the safer move whenever there is any real doubt about the donor’s status.
Form 3520 Is a Separate Obligation
Form 708 is not the only form you may owe. Under Section 6039F, U.S. recipients of large gifts from foreign persons generally have to file Form 3520 as well, and that duty exists whether or not Section 2801 also applies. Form 3520 is due with your income tax return for the year you received the gift, typically April 15, with extensions available.
The penalty for filing Form 3520 late is 5% of the gift’s value per month, capped at 25%. A reasonable cause exception exists but the IRS applies it narrowly. On a $1 million gift, the maximum penalty is $250,000, on top of any Section 2801 tax owed. Because the two obligations run independently, a U.S. recipient of a large gift from a covered expatriate can face both the 40% tax and the 25% penalty if the paperwork is not handled properly. If you know or suspect the donor gave up U.S. citizenship or long-term residency, track the transfer from the day it arrives and calendar both filings.