The OBBBA contains provisions targeting certain cross-border cash transfers to recipients outside the U.S. As part of the OBBBA, a new Section 4475 is introduced, whereby 1% excise tax will be applied on remittance transfers to individuals who send funds abroad. This provision is set to take effect for payments made beginning on or after January 1, 2026. This article elaborates on the application of the new act.
Who Pays The Excise Tax
The excise tax will apply to transfers funded by cash, money order, cashier’s checks or similar physical instruments. The obligation to pay the tax is primarily imposed on the sender of the funds. The money transfer service provider such as Western Union, MoneyGram, and other similar remittance service provider must collect tax at the time of transfer and remit it to the IRS. If the sender fails to pay the tax, the money transfer service provider will secondarily be liable for payment.
Exceptions to the Excise Tax
There are certain exemptions from the excise tax under the new rule. The excise tax is only limited to transfers that are initiated by individuals within the U.S. and its territories or on a U.S. military base, which means that commercial transfers are exempt1. Businesses remitting funds abroad for operational, payroll or to vendors outside of the U.S. are not subject to the excise tax as long as they are commercial in nature. Transfers funded electronically by U.S. bank accounts or U.S. issued debit or credit cards are exempt from the excise tax.
Impact of the Excise Tax
The 1% excise tax is applicable to personal, family or household transfers that are funded mostly by cash, money orders and similar physical instruments. The tax will affect individuals that rely on informal methods to remit money outside of the U.S., particular low income and immigrant communities. However, individuals are able to take advantage of the exemptions provided under the new bill such as using U.S. based bank accounts, debit or debit cards or by initiating transfers using financial institutions. Individuals who have recurring transfers to recipients outside of the U.S. may consider implementing adjustments to their transfer practices, such as aggregating multiple transfers into fewer transactions, using federally regulated financial institutions, and adoption of financial technology platforms that facilitate compliant and tax-efficient remittance mechanisms. A thorough understanding of the statutory framework and enumerated exemptions may enable taxpayers to mitigate exposure to the excise tax while continuing to provide financial support to family members and loved ones abroad.
This is a follow-up to our previously published articles, where we introduced the major provisions of the OBBBA impacting individual taxpayers.
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