Do Foreign Citizens Living in the US Pay Inheritance Tax?
As a foreign citizen living in the U.S., it’s important to understand your tax liability in various scenarios. For example, suppose you just received an inheritance. Does that mean you must pay federal or state taxes as a resident alien living in the United States?
Foreign citizens residing in the United States are beholden to the same tax requirements as any American citizen. That means you won’t be taxed on the federal level if you receive an inheritance from a foreign relative, but you may be taxed on the state level. There is no federal inheritance tax, although you may have to pay an estate tax depending on the circumstances of your inheritance. States can levy their own inheritance taxes, so ask a tax CPA to clarify whether you have to pay state taxes on an inheritance as a foreign citizen living in the United States.
We’re here to help foreign citizens living in the U.S. navigate our complicated tax code. To learn more about the tax accountants at US Tax Help, call today at (541) 362-9127.
Inheritance Taxes for Foreign Citizens Living in the US
Paying taxes on an inheritance can be complicated. In the U.S., only certain states levy inheritance taxes, yet the federal government will expect you to report any earnings on inherited assets. So, it can be complex. Things can get even more confusing for foreign citizens living in America. If you reside in the U.S. but are not a citizen of this country, how will inheritance taxes affect you?
The IRS won’t tax you if you receive an overseas inheritance. This applies to all people living in the United States, citizens or not. That said, while you may not have to pay any taxes to the IRS, you may have to pay an inheritance tax to your state. Some states do impose an inheritance tax on foreign inheritances. If you reside in a state, even as a non-citizen, you are beholden to its tax code. To check all of your boxes and ensure you understand your tax liability for a foreign inheritance, reach out to a tax accountant for clarification. Resident aliens who fail to comply with federal and state tax requirements can face serious consequences.
If you receive an inheritance from an American as a non-citizen living in the U.S., you may have a tax liability to the IRS. While there is no federal inheritance tax, there is an estate tax. If you inherit a decedent’s estate, you’ll be responsible for paying the taxes associated with the transfer of property and maintaining any tax liabilities the estate had or will have in the future. You’ll also have to pay income tax on any earnings you make from inherited assets.
Only six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If you received an inheritance from your American spouse as a resident alien, you might be exempt from an inheritance tax, even if you live in one of the states mentioned above that enforce such a tax. Just 13 states levy an estate tax in addition to the federal tax, which you won’t need to worry about unless you inherited an estate as a foreign citizen living in the United States.
How Do You Report an Inheritance as a Foreign Citizen Living in the US?
If you’ve just inherited assets from an American or foreign loved one as a resident alien, you may need to report it to the IRS. Even if you don’t have to pay taxes on your inheritance, that doesn’t mean the IRS and state tax agencies don’t want to know about it. IRS reporting requirements can be complicated, especially if you’re new to the process, so seeking help from a skilled tax accountant is generally wise.
Since there is no federal inheritance tax, resident aliens who inherit assets may think there’s no reason to inform the IRS. Unfortunately, that’s not the case. If your inheritance came from a foreign relative and exceeds $100,000, you must report it to the IRS using Form 3520.
If you inherit assets from an American as a foreign citizen living in the U.S., you may not need to report it to the IRS at first. However, it’s not always that simple. If you inherit anything that’s considered taxable income to the decedent, you’ll have to report it to the IRS. Generally, you can do this by including it on your annual tax return. If you inherit an estate from an American and are not simply a beneficiary, all this and more needs to be reported using IRS Form 1041 annually.
Sourcing the proper forms to report the inheritance to your state’s tax collection agency can be difficult. Remember, each state can have its own rules and methods of imposing an inheritance tax, which will apply to you as a foreign citizen residing in that state. So, it’s important to consult with an experienced tax accountant to ensure you understand your reporting responsibilities after receiving an inheritance.
It’s also important to note that you may have to report your inheritance to your country of origin, if it operates within a citizenship-based taxation system.
What Happens if You Don’t Pay Taxes on an Inheritance as a Foreign Citizen Living in the US?
You can face serious consequences if you fail to report your inheritance to the IRS or your state’s tax agency. This is the case even if you only had to report your inheritance and not pay taxes on it. Penalties can be severe, so it’s important to hire a tax accountant when you receive an inheritance to ensure you’re not penalized.
Foreign citizens in the U.S. who fail to file IRS Form 3520 after receiving an inheritance of over $100,000 can incur penalties equal to 35% of the distributions they receive. Regardless of your total inheritance, losing 35% of it to IRS penalties is a considerable loss.
Failing to file IRS Form 1041, if required, can also have serious consequences. If you inherited an estate and are required to file a tax return for the estate each year but don’t, you can incur a monthly penalty equal to 5% of the unpaid taxes for up to five months.
States can also impose severe penalties like the IRS does. These penalties are imposed upon anyone with a tax or reporting liability to the IRS, including foreign citizens who reside in the United States.
Our Tax CPAs Can Help Foreign Citizens Living in the US Report Inheritances
If you’re unsure about your potential inheritance tax liability as a foreign citizen living in the U.S., our tax CPAs can help. To learn more about the tax accountants at US Tax Help, call today at (541) 362-9127.