The IRS Finalizes Regulations for the Section 2801 Inheritance Tax


Anyone considering abandoning their U.S. citizenship or ending a long-term U.S. residency must understand that they may be assessed an “expatriation tax.” An “expatriation tax” consists of two components: the “exit tax” and the “inheritance tax.” Both may be triggered upon abandonment of citizenship or abandonment of a green card. This article focuses on the inheritance tax component of the expatriation tax.
The Exit Tax Under the HEART Act
The Heroes Earnings Assistance and Relief Act of 2008 (“HEART”) established Internal Revenue Code Section 877A. Section 877A established the term “covered expatriate.” Under this new regime, a covered expatriate is required to recognize gain on their worldwide assets as part of a deemed sale the day before the expatriation date in the form of an exit tax. However, gain of up to $890,000 (for the 2025 calendar year) is not subject to the deemed sale provisions of Section 877A. A “covered expatriate” is an individual who: 1) relinquishes his or her U.S. citizenship or permanent residence (but only if the expatriate was a U.S. resident during 8 out of the last 15 years), and 2) meet one of the following tests: i) he or she had a net worth of over $2 million when they expatriated; ii) he or she had an average annual income tax burden of more than $206,000 (indexed annually during the five preceding years; or iii) he or she failed to certify compliance with U.S. tax obligations over the last five years. Section 877A also imposes the highest applicable gift or estate tax rate (40%) on U.S. citizens or residents who receive a so-called “covered gift or bequest” from an expatriating individual. In other words, the HEART Act imposes an “inheritance tax” on the recipient of a gift from a covered expatriate.
Introduction to the Section 2801 Inheritance Tax
In addition to the exit tax discussed above, Section 2801 enacted by the HEART Act added a new “Inheritance Tax” on certain gifts or bequests made by “covered expatriates” to U.S. recipients. Section 877A imposes the highest applicable gift or estate tax rate (40 percent) on U.S. citizens or residents who receive a so-called “covered gift or bequest” from an expatriating individual. In other words, the HEART Act imposes an “inheritance tax” on the recipient of a gift from a covered expatriate.
The term covered gift means any property acquired by a gift directly or indirectly from an individual who is a covered expatriate at the time the gift is received by the U.S. recipient, regardless of the situs of the gift. A gift generally includes any property transferred during the donor’s lifetime for less than adequate consideration. See IRC Section 2511. Adequate consideration generally means the fair market value of transferred property. The fair market value of the property is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having knowledge of relevant facts. Thus, if Mom sells Blackacre to Child for $100, and Blackacre is actually worth $250, Mom has made a gift to Child of $150. See Treas. Reg. Section 25.2518-8.
The inheritance tax is payable by the recipient of the gift or bequest, not the expatriate. There is no expiration of the potential applicability of Section 2801. Thus, a gift or bequest made by a covered expatriate several years (or longer) after expatriation could trigger the tax. The Inheritance Tax is imposed in addition to the mark-to-market tax paid by the covered expatriate upon exit. Currently, the tax rate imposed by Section 2801 is 40 percent of the value of the gift or bequest. Section 2801 taxes U.S. citizens or residents who receive gifts and bequests from covered expatriates, which would otherwise have escaped U.S. transfer taxes (as a consequence of the donor’s expatriation). Transfers by covered expatriates are subject to a tax similar to the gift and estate tax but saddle the donee with the inheritance tax. The term “gift” for expatriation tax purposes has the same meaning that would ordinarily apply under U.S. gift tax laws. However, Prop. Reg. Section 28.2801-2(g) do not apply the the following exceptions to the gift tax that may typically apply:
- The transfer of intangible property by an individual not domiciled in the U.S.;
- The transfer of property to a political organization;
- The transfer of stock in a foreign corporation by an individual not domiciled in the U.S.;
- Annual transfer exclusions;
- Transfers for educational and medical expenses; and
- Transfers that occur as the result of a waiver of a pension right.
The Proposed Regulations provide limited exclusions from the gift tax. The exclusions are as follows:
- Gifts disclosed on a timely filed gift tax return by the covered expatriate. The covered expatriate must also timely satisfy any applicable gift taxes.
- Gifts disclosed on a timely filed estate tax return by the covered expatriate’s estate. The covered expatriate’s estate must also timely satisfy any applicable gift taxes.
- Gifts from a covered expatriate to a qualified U.S. charity.
- A gift from a covered expatriate to his or her spouse to the extent of a marital deduction under Internal Revenue Code Section 2523 or Section 2056 would have been permitted if the individual was a U.S. citizen or resident at the time of transfer.
- A transfer by a covered expatriate pursuant to a qualified disclaimer is not considered a gift subject to the inheritance tax.
The U.S. recipient of a gift or bequest from a covered expatriate discloses the gift on a Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates.
The IRS Has Issued Final Regulations on the Taxation of Gifts and Bequests Received from Covered Expatriates
Up until very recently, the rules that governed the taxation of a gift from a covered expatriate were in the form of proposed regulations that were not being enforced by the Internal Revenue Service (“IRS”). Recently, the IRS issued final regulations regarding the taxation of gifts and bequests received from a covered expatriate. The significance of the IRS finalizing regulations means that the IRS will begin to enforce the tax on gifts and bequests received from covered expatriates. The final regulations largely adopt the proposed regulations. However, the final regulations will only cover gifts and bequests received by U.S. recipients on or after January 1, 2025.
A U.S. recipient of a gift or bequest from a covered expatriate calculates the Section 2801 tax liability by reducing the total amount of the gift or bequest received during the calendar year by a per-donee exclusion in effect for the calendar year. (The exclusion for the 2025 calendar year is $19,000). The value above the pre-donee exclusion amount is multiplied by the highest estate or gift tax rate in effect during the year of the gift. Currently, the highest estate and gift tax rate is 40%. The resulting figure may potentially be reduced by any estate or gift tax paid to a foreign country.
Conclusion
Congress enacted the HEART Act in 2008. Internal Revenue Code Section 2801 called for the imposition of a tax payable on certain gifts and bequests received by U.S. citizens and green card holders from covered expatriates. Enforcement of Section 2801 was suspended until the IRS promulgated final regulations governing these gifts and bequests. The IRS has finalized final regulations for Internal Revenue Code Section 2801. Accordingly, a tax applies to any gifts and bequests received from a covered expatriate beginning January 1, 2025. Anyone that has received a gift or bequest from an individual that can be classified as a covered expatriate should plan accordingly.
Anthony Diosdi is one of several international tax attorneys at Diosdi & Liu, LLP. As an international tax attorney, Anthony Diosdi provides international tax advice to closely held entities and publicly traded corporations. Anthony Diosdi also represents closely held entities and publicly traded corporations in IRS examinations. Diosdi Ching & Liu, LLP has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in international tax matters throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.

Written By Anthony Diosdi
Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.
