By Alicea Castellanos, CPA

A $500,000 gift from a covered expatriate in 2026 can create a $192,400 US tax bill for the recipient, not the donor: $500,000 minus the $19,000 Section 2801(c) exclusion, multiplied by 40% (https://www.irs.gov/instructions/i708.). 

Form 708 is the IRS’s new filing mechanism for that result. Individual US citizens and residents, domestic trusts, and certain foreign trusts use it to report and pay the Internal Revenue Code (“IRC”) Section 2801 tax on covered gifts and covered bequests received directly or indirectly from covered expatriates (https://www.irs.gov/form708). The IRS says final Section 2801 regulations apply to covered gifts and covered bequests received on or after January 1, 2025, although the underlying statute was added by the Heroes Earnings Assistance and Relief Tax Act of 2008 and has applied to expatriations after June 16, 2008(https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax). 

Section 2801 is unusual because it reverses the normal gift-tax posture. Instead of looking first to the transferor, IRC §2801 imposes the tax on the US citizen or resident who receives the covered gift or bequest; domestic trusts are treated similarly, and distributions from foreign trusts can carry the taint through to US beneficiaries (https://www.law.cornell.edu/uscode/text/26/2801). The statute also excludes certain transfers already reported for US gift or estate tax and certain transfers to a spouse or charity (https://www.law.cornell.edu/uscode/text/26/2801).  

Tax Implications for US Recipients 

The first question is whether the transferor was a “covered expatriate.” Under IRC §877A, that means a former US citizen or long-term green card holder who expatriated and met the statutory covered-expatriate tests, which cross-reference IRC §877(a)(2) (https://www.law.cornell.edu/uscode/text/26/877). For Form 708 purposes, the IRS instructions identify three core triggers: average annual net income tax liability above $206,000 for 2025 or $211,000 for 2026; net worth of $2 million or more on the expatriation date; or failure to certify five years of US federal tax compliance on Form 8854 (https://www.irs.gov/instructions/i708).A long-term resident generally means a noncitizen who held lawful permanent resident status in at least eight of the 15 taxable years ending with the year residency ends, with treaty-residency elections potentially changing the count (https://www.law.cornell.edu/uscode/text/26/877).  

The second question is whether the recipient is in the Section 2801 cohort. For this regime, “resident” is not the income-tax substantial-presence test; it is the estate-and-gift-tax domicile standard, based on living in a place with no definite present intention of leaving (https://www.irs.gov/instructions/i708). That distinction matters for mobile families: a London-based US citizen is in the regime, but a non-US citizen beneficiary with no US domicile may not be. 

The third question is whether the property is a covered gift or covered bequest. Covered gifts generally include property received by gift from a covered expatriate, wherever located, if the expatriate is covered when the gift is received (https://www.irs.gov/instructions/i708). Covered bequests generally include property received by reason of a covered expatriate’s death, again regardless of location, but only to the extent it would have been included in the expatriate’s gross estate if the person had been a US citizen immediately before death (https://www.irs.gov/instructions/i708). 

Once those gates are crossed, the calculation is mechanical but unforgiving. Net covered gifts and covered bequests are reduced by the Section 2801(c) amount, which equals the annual gift-tax exclusion; for 2025 and 2026, that amount is $19,000 (https://www.irs.gov/instructions/i708). The remaining net amount is multiplied by 40%, then reduced by qualifying foreign gift or estate tax paid on the same transfer, but the Form 708 instructions require support, such as the foreign return and proof of payment (https://www.irs.gov/instructions/i708). 

Form 708 also creates a timing problem. For 2025 covered gifts and bequests, Form 708 is due June 15, 2027; more generally, the annual return is due on the 15th day of the 18th month after the close of the calendar year of receipt (https://www.irs.gov/instructions/i708). A six-month filing extension is available through Form 7004, but the extension does not extend the time to pay (https://www.irs.gov/instructions/i708). Late filing and late payment penalties under IRC §6651 may apply absent reasonable cause (https://www.irs.gov/instructions/i708). 

Form 3520 is Not Displaced 

A US person receiving a large foreign gift or bequest may still need Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if the foreign-gift thresholds are met: more than $100,000 from a nonresident alien or foreign estate, or more than $20,116 in 2025 and $20,573 in 2026 from foreign corporations or partnerships (https://www.irs.gov/businesses/gifts-from-foreign-person). 

The hardest cases will involve family trusts and incomplete information. A US beneficiary receiving a distribution from a non-electing foreign trust may need to determine the portion attributable to covered gifts or bequests, and the IRS instructions allow a protective Form 708 when the recipient reasonably concludes the transfer is not covered but wants to start the limitations period (https://www.irs.gov/instructions/i708).⁴ 

That is often the prudent filing posture when the expatriate’s Form 8854 history, net worth, or prior tax liability is unavailable. 

For cross-border families, the practical takeaway is simple: every substantial gift, inheritance, or trust distribution from a former US citizen or long-term green card holder now needs a Section 2801 file before funds are spent.

Alicea Castellanos, CPA, is the CEO and Founder of Global Taxes LLC. Alicea provides personalized US tax advisory and compliance services to high-net-worth families and their advisors. Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm andworked at a prestigious global law firm and CPA firm. Alicea specializes in US tax planning and compliance for non-US families with global wealth and asset protection structures which include non-US trusts, estates, and foundations that have a US connection. Alicea also specializes in foreign investment in US real estate property and other US assets, pre-immigration tax planning, US expatriation matters, US persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, and foreign companies wanting to do business in the US. Alicea is fluent in Spanish and has a working knowledge of Portuguese.