A $500,000 gift from a covered expatriate in 2026 can create a $192,400 U.S. tax bill for the recipient, not the donor: $500,000 minus the $19,000 Section 2801(c) exclusion, multiplied by 40%.⁴

Form 708 is the IRS’s new filing mechanism for that result. Individual U.S. 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.¹ 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, 2008.²

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 U.S. 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 U.S. beneficiaries.³ The statute also excludes certain transfers already reported for U.S. gift or estate tax and certain transfers to a spouse or charity.³

Tax implications for U.S. recipients

The first question is whether the transferor was a “covered expatriate.” Under IRC §877A, that means a former U.S. citizen or long-term green-card holder who expatriated and met the statutory covered-expatriate tests, which cross-reference IRC §877(a)(2).⁵ 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 U.S. federal tax compliance on Form 8854.⁴ 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.⁵

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.⁴ That distinction matters for mobile families: a London-based U.S. citizen is in the regime, but a non-U.S. citizen beneficiary with no U.S. 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.⁴ 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 U.S. citizen immediately before death.⁴

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 $19,000.⁴ 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.⁴

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.⁴ A six-month filing extension is available through Form 7004, but the extension does not extend the time to pay.⁴ Late filing and late payment penalties under IRC §6651 may apply absent reasonable cause.⁴

Form 3520 is not displaced. A U.S. 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.⁶

The hardest cases will involve family trusts and incomplete information. A U.S. 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.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 U.S. citizen or long-term green-card holder now needs a Section 2801 file before funds are spent. Contact Global Taxes LLC to review covered-expatriate status, model the Form 708 tax, and coordinate Form 3520 reporting before the first filing deadline. This article is informational only and does not constitute professional tax, legal, or financial advice.

Works Cited

1. IRS. “About Form 708, United States Return of Tax for Gifts and Bequests Received From Covered Expatriates.” Internal Revenue Service, 28 June 2026, https://www.irs.gov/form708.

2. IRS. “What’s New — Estate and Gift Tax.” Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax.

3. Legal Information Institute. “26 U.S. Code § 2801 — Imposition of Tax.” Cornell Law School, https://www.law.cornell.edu/uscode/text/26/2801.

4. IRS. “Instructions for Form 708 (12/2025).” Internal Revenue Service, https://www.irs.gov/instructions/i708.

5. Legal Information Institute. “26 U.S. Code § 877 — Expatriation to Avoid Tax.” Cornell Law School, https://www.law.cornell.edu/uscode/text/26/877.

6. IRS. “Large Gifts or Bequests From Foreign Persons.” Internal Revenue Service, 17 Apr. 2026, https://www.irs.gov/businesses/gifts-from-foreign-person.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. 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, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates, and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. 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 U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPA), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).

Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession. Alicea has also been recognized as a leading expert for tax advice and she has been invited to join Advisory Excellence, as their exclusively recommended tax expert in the USA.

In 2021 and 2022, Alicea won Gold and Silver in Citywealth's Powerwomen Awards for USA - Woman of the Year - Business Growth (Boutique). In 2023, she received Gold for Company of the Year - Female Leadership (Boutique) and was listed in the Global Elite Directory, an exclusive directory of top wealth advisors.

In 2024, Alicea was named to Citywealth's Top 50 Tax Professionals, shortlisted for the Magic Circle Awards, peer-nominated as a Non-Legal Adviser, and appointed as a judge for the Citywealth Powerwomen Awards USA. She is also certified as an International Business Advisory Firm by AuditTrust International and a proud STEP member for 2024/2025.