Taxes on Foreign Inheritance: What Do You Need to Declare?
If you’ve received an inheritance from abroad, 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 related to Foreign inheritance tax and how to make sure you comply with all filing requirements.
Key Takeaways
- An estate tax is a tax based on the property that belonged to a deceased person. An inheritance tax is a tax imposed on a person that received the property of a deceased person.
- In general, US federal estate taxes only apply when a deceased person had property valued at over $12 million USD.
- There is no federal inheritance tax, but several states and the District of Columbia do have inheritance taxes.
Is Foreign Inheritance Taxable from Overseas Relatives?
No, you won’t have to pay any federal taxes on an inheritance received from a non-US citizen living abroad. However, you may have to report it to the IRS and pay a foreign inheritance tax or a state inheritance tax from overseas inheritances.
The US would only impose a tax on the estate for any property with a “US situs.” US situs means that an asset is a 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 possible estate tax.
But again, for any assets that don’t qualify as US situs, no federal inheritance or estate 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.
Do You Have to Report a Foreign Inheritance to the IRS?
Reporting Foreign inheritance depends on how much inheritance you receive. Let’s go over some of the most common scenarios for how to report a foreign inheritance to the IRS.
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 15th.)
This amount can also includes multiple gifts or bequests received during the 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.
Foreign Trusts
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 by the March 15 deadline, then the US owner must file the form themselves. Which is technically called a subsititute from 3520-A. This form needs to be filed with the IRS’s Ogden, UT office. Currently, it cannot be electronically filed. It must be printed, signed, and mailed. It is also recommended to include a copy of forms 3520 and 3520 A as an attachment to your individual 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 can’t file it with your individual income tax return. Instead, this form is filed electronically through the FinCEN BSA E-Filing System.
The due date is April 15th. But if you miss that deadline, it will automatically extend to October 15th. You won’t need to file a request for an extension.
Dreading the last minute scramble pulling together your tax documents? Despair no more! This simple checklist lists the documents you need to have on hand when preparing to file.
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 15th, 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. 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, most expats won’t have to pay 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.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
Featured In
