Do You Have to Pay US Taxes on Foreign Inheritance?

Though the passing of a loved one is undoubtedly a difficult event, it sometimes happens that a person benefits financially from such an occurrence because they are the recipient of an inheritance. In many cases, especially those involving large amounts of money, there are substantial reporting and withholding requirements that go along with an inheritance, thanks to U.S. tax laws. However, the situation can become more complicated if one or more parties are not American citizens or live outside the United States. In this scenario, a U.S. taxpayer might reasonably wonder, “Do you have to pay U.S. taxes on a foreign inheritance?” To find out, keep reading as the international tax accountants at US Tax Help provide some answers.

How the US Taxes Foreign Inheritances

Generally speaking, the Internal Revenue Service (IRS) imposes steep taxes on estates before they are passed on to the eventual recipient. If you recently received or are about to receive an inheritance from someone outside the United States, there are some important factors to keep in mind when determining the tax implications.

One of the most important factors to consider is the nature of the assets being passed to you. If any of the property or other assets is located or based in the United States – sometimes referred to as “U.S. situs” property – those assets will likely be taxed significantly. Similarly, the status of the person who passed away is taken into consideration as well; those who were U.S. expatriates or U.S. residents may have their estates taxed by the IRS.

To figure out the tax liability on the estate of a nonresident foreign citizen, the executor of the estate will use IRS Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return. It’s important to note, however, that the U.S. will only tax assets from within the United States; those that are held outside the country and are unrelated to any U.S.-based companies or property will not be taxed by the IRS.

The good news in all of this is that any U.S. citizen who is inheriting assets that are wholly based outside the U.S. will not be taxed by the IRS on those assets in any way. Keep in mind, however, that certain states may impose an inheritance tax on the money; be sure to check with a qualified international tax specialist to learn more.

US Reporting Requirements for Foreign Inheritances

Even if the inheritance you are receiving is not going to be taxed, you’ll probably still have to submit one or more forms to relay information about the transfer to the appropriate government agencies; failure to do so could result in substantial penalties. The following are the most common forms that must be filed when receiving a foreign inheritance:

IRS Form 3520

The main form you need to concern yourself with is IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This form applies in cases where a U.S. taxpayer receives more than $100,000 through a foreign inheritance or is engaged in specific transactions with foreign trusts. However, because this is an information return and not a tax return, no payment needs to be submitted in relation to this form.

FinCEN Form 104

If you are receiving a foreign inheritance, it’s likely that claiming your money will require transferring funds from a bank account in another country to one in the U.S. If so, you may be required to file Form 104 with the Financial Crimes Enforcement Network, or FinCEN, as part of the government’s effort to fight money laundering.

FinCEN Form 114

On a related note, those who, at any point in the tax year, have assets in foreign financial accounts with a total value of more than $10,000 are required to submit a Report of Foreign Bank and Financial Accounts (better known as an FBAR) using FinCEN Form 114. This form can be submitted electronically and is generally due by April 15, the standard tax filing deadline.

IRS Form 8938

Like the FBAR, this form applies to those who have foreign financial assets over a certain value at any point in the tax year. The Foreign Account Tax Compliance Act (FATCA) mandates that anyone who meets one of the following thresholds file IRS Form 8938, Statement of Specified Foreign Financial Assets:

  • Taxpayers living in another country: Single taxpayers living outside the U.S. or married taxpayers filing alone must file Form 8938 if their foreign financial assets are worth more than $200,000 at the end of the tax year or more than $300,000 at any point during the year; these values are doubled for married taxpayers filing this form jointly.
  • Taxpayers in the U.S.: Single taxpayers or married taxpayers filing separate returns have to file Form 8938 if their foreign assets are valued at more than $50,000 at the end of the year or more than $75,000 at some point during the year; again, these values are doubled for married taxpayers jointly filing this form.

Experienced International Tax Accountants Available for Help with Foreign Inheritances

When it comes time to file all the forms related to a foreign inheritance, it’s important that no mistakes be made, because the IRS can impose steep penalties on those who fail to comply with their rules. If you or someone you know has recently received a foreign inheritance or is likely to receive one soon, know that international tax accountant Ted Kleinman, CPA, has more than 30 years of experience handling issues like yours for U.S. taxpayers and American expats living abroad. To learn more about how Ted and the team at US Tax Help can assist you, visit us online or call (541) 362-9127 today.