If you’ve received an inheritance from a non-US person, you may wonder whether the IRS expects you to pay a foreign inheritance tax. In this article, we’ll go over the IRS rules on foreign inheritance—and how they might apply to you – as well as the right expat tax forms you’ll need to fill out.
Do You Have to Pay Foreign Inheritance Taxes on an Inheritance From Relatives Abroad?
No, in most cases, you won’t have to pay any taxes on an inheritance received from a non-US citizen living abroad. However, you may have to report it to the IRS anyway.
If a US person (whether a US citizen or resident alien) receives an inheritance from a non-US person, the IRS generally doesn’t impose any taxes on the recipient or the estate of the deceased. The only exception to this is if the assets left in the inheritance are “US situs.”
US situs means that an asset is real and tangible property—typically real estate—located within the United States. For example, if a non-US person left a US citizen a house in California, that would qualify as a US situs asset. This property would be subject to a tax, usually at 40% of its value.
But again, for any assets that don’t qualify as US situs, no federal inheritance tax will apply. (Though you may owe state taxes on assets inherited from a foreign source—this will depend on your specific circumstances.)
This only applies to owing a foreign inheritance tax, though. What about reporting the inheritance itself?
Do You Have to Report a Foreign Inheritance to the IRS?
Even if you don’t think you owe any foreign inheritance taxes, you may still have to report the inheritance. Let’s go over some of the most common scenarios for this.
Foreign Gifts of More Than $100,000
If you receive a gift or inheritance valued at more than $100,000 from a non-US person (or their estate), you will need to file IRS Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts at the same time as your individual income tax return. (For most taxpayers, that will be April 15.)
This amount can also include multiple applicable sums received within a single year.
For example, let’s say a non-US person gave you a gift valued at $30,000. Then, during the same year, a separate non-US person left you an inheritance of $80,000. Because the total amount you received in one year is greater than $100,000, you would be required to report both through Form 3520.
The good news is that this is an informational return, not a tax return. You’re simply reporting the gift or inheritance, not paying taxes on it. However, if you fail to file Form 3520 accurately or on time, you may be subject to a fine of up to 35% of the gross value of the gift, inheritance, or both.
In some cases, your foreign inheritance may be placed in a trust.
If any portion of a foreign trust has an owner who is a US person, the trust must file Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner by March 15 to report this.
However, the US owner is ultimately responsible for making sure that this form is filed. If the foreign trust fails to file Form 3520-A on its own by the March 15 deadline, then the US owner must file the form themselves. In this case, the US owner will have to attach a completed Form 3520-A to their Form 3520 and submit both with their individual income tax return.
Like Form 3520, Form 3520-A is merely an informational return. You won’t owe anything on it. But if you fail to file it accurately and on time, you may be subject to a fine of $10,000—or 5% of the gross value of the inheritance, whichever is greater.
Foreign Bank Accounts Containing More Than $10,000
Let’s say you keep the money you receive from the inheritance in one or more foreign bank accounts. If the combined amount of money you have in those foreign bank accounts exceeds $10,000, you will need to report this by filing a Report of Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114.
Once again, this is an informational return, and doesn’t create a tax liability. You won’t have to file it with your individual income tax return, either. Instead, this form is filed electronically through the FinCEN BSA E-Filing System.
The due date is April 15. But if you miss that deadline, it will automatically extend to October 15. You won’t need to file a request for an extension.
Offshore Assets Worth More Than $200,000
If your inheritance brings the value of your total offshore assets above certain thresholds, you will have to file Form 8938: Statement of Specified Foreign Financial Assets. The threshold depends on your filing status.
For example, if you are an unmarried US person living outside of the United States, you would be required to file Form 8938 if your combined offshore assets were worth more than $200,000 on the last day of the tax year or more than $300,000 at any other time of the tax year.
To learn what requirements apply to you, see the instructions for Form 8938 provided by the IRS.
If you are required to file Form 8938, it will be due at the same time as your individual income tax return. (April 15 for most taxpayers.) Failing to file an accurate form by that deadline may result in an initial fine of $10,000. You will then have 90 days to file an accurate form after being notified by the IRS.
If you still haven’t filed once the 90 days have expired, you may be fined an additional $10,000 for every 30 days following, up to a maximum amount of $50,000.
Transferring Money to US Bank Accounts
If you transfer any of your inheritance to a US bank account, you won’t have to file anything out of the ordinary. However, if you deposit more than $10,000, the bank will file FinCEN Form 104. And if you bring the money into the US in the form of cash, you will need to use FinCEN Form 105 to declare it.
This is required so that the US Department of the Treasury can investigate any possible red flags for illegal activity, such as money laundering. Don’t worry, though. As long as you’re operating within the law, you’re safe.
Do Expats Have to Pay Taxes on Foreign Inheritances They Receive Abroad?
No, in most cases, expats won’t have to pay any US tax on a foreign inheritance.
In fact, the IRS rules on foreign inheritance are the same for expats as for US persons living within the United States. You may need to file one or more of the informational forms listed above, but it’s unlikely that you’ll have any expat tax liability.
Of course, for both expats and US residents, if you accrue any income from your inheritance (such as through investing) you may owe taxes as a result.
For more on the IRS rules on foreign inheritance, please visit the IRS website.
Let Greenback Expat Tax Services Help You Manage Your Tax Strategy
Still, have questions about the foreign inheritance tax? Want a little help with your expat taxes? We’re always happy to lend a hand, as well as with US citizens with foreign business.
The Greenback team has spent years giving expats across the world the expert advice they need to meet their US tax obligations and optimize their financial strategies.
Just let us know how we can help you, and we’ll get started right away.