Do You Need to Report a Foreign Inheritance to the IRS?
Receiving an inheritance doesn’t mean you can just transfer a large sum of money to your bank account, especially if you’re an American expatriate. While you might not be taxed on a foreign inheritance, you will most likely need to report it to the IRS.
Depending on the sum of a foreign inheritance you receive while living abroad, you may have to complete several forms. IRS Forms 8938 and 3520 must be completed if the inheritance you receive increases your foreign earned income over a certain threshold or the inheritance itself is over a particular amount. In addition to reporting a foreign inheritance to the IRS, you may also have to report it to other federal institutions.
The experienced CPAs for American expatriates at US Tax Help are dedicated to helping expats navigate federal taxes after moving abroad. Our team can inform you on how to report a foreign inheritance to the IRS. For help during tax season and beyond, visit our website or call the CPAs for American expatriates at US Tax Help today at (541) 362-9127.
Do I Need to Report a Foreign Inheritance to the IRS?
American expatriates who receive a foreign inheritance will most likely have to report it to the IRS. When you move abroad and retain your American citizenship, your finances are still monitored by the IRS. Because of this, you might have to report a foreign inheritance in several forms. Depending on the sum of an inheritance you receive and where you decide to hold it, you could be required to report it on IRS Form 8938, IRS Form 3520, and FinCEN Form 114. The rules to report an inheritance differ between American citizens who reside domestically and those who live abroad.
IRS Form 8938
American expatriates need to complete IRS Form 8938 if their annual foreign financial assets exceed a certain amount throughout the tax year. An inheritance is not typically considered income, but it is still a financial asset you hold. So, if you’re an expat and you received a foreign inheritance while living overseas, it might be reportable on Form 8938. This applies to expats significantly because living abroad likely means that the majority of your financial assets are, in fact, foreign. If the foreign inheritance you receive increases your financial assets to a certain degree, you might have to report it with this form.
The threshold for reporting foreign financial assets differs between American expats and citizens in the United States. Expatriates who file their tax returns independently must also file Form 8938 if their total foreign financial assets exceed $200,000 on the final day of the tax year or $300,000 at any time during the tax year. Those filing jointly must report their foreign financial assets if they are above $400,000 on the last day of the tax year or $600,000 at any point throughout the year. If the foreign inheritance you receive significantly boosts your aggregate foreign financial assets, you may have to report it on IRS Form 8938.
IRS Form 3520
The need to file IRS Form 3520 depends on the amount of a foreign inheritance. If the amount you inherit exceeds $100,000, you will have to report it on Form 3520. An inheritance below $100,000 does not need to be reported on this form. Also known as the Annual Return to Report Transactions with Foreign Trusts and Receipts of Certain Foreign Gifts, Form 3520 may be unknown to many American expatriates. Some expats might be unaware that they have to report any sum of a foreign inheritance or that it requires this specific form. Seeking guidance on how the United States tax code applies to expats from accountants, like the CPAs for American expatriates at US Tax Help, can be beneficial. Otherwise, you could fail to report a foreign inheritance and face penalties from the IRS.
FinCEN Form 114
The Federal Crimes Enforcement Network (FinCEN) requires American expatriates to report on the status of their foreign-held bank accounts. If the foreign inheritance you receive is then transferred to one of your foreign bank accounts, you’ll likely need to complete a Report of Foreign Bank and Financial Accounts (FBAR). That is so the United States can monitor the financial activities of American citizens overseas. Using Form 114, you must report if the aggregate amount in your foreign-held bank accounts exceeds $10,000. Depending on the amount you inherit, you will likely have to complete this form as well.
While FinCEN is separate from the IRS, it has similar deadlines and penalties for those who fail to file appropriately. An experienced accountant, such as the CPAs for American expatriates at US Tax Help, can explain how to report to FinCEN and the IRS. New American expats who have never held foreign bank accounts before may be completely unaware of the existence of FinCEN or the need to report foreign financial assets.
Why Do I Need to a Report Foreign Inheritance to the IRS?
American citizens must always pay United States taxes and complete the necessary forms as long as they retain their citizenship. Moving abroad doesn’t exempt you from paying taxes in the United States. While a foreign inheritance will not be taxed upon transfer to your foreign account, you still need to report it in most cases.
Though an inheritance can be taxed domestically, the IRS doesn’t tax it if it’s strictly foreign. That means that if an inheritance is from a foreign, non-U.S. citizen, it will not be taxed if it is placed in a foreign bank account. Reporting an inheritance doesn’t mean the IRS will tax it; the IRS just needs to know what is in your foreign bank accounts, above a certain threshold.
That’s because the United States abides by a citizen-based taxation system instead of a residence-based one. So, American expatriates are still required to report their assets and file their federal tax returns, even if they live overseas. That being said, many expatriates are unaware of this rule when tax season arrives. Failure to complete the necessary forms and report a foreign inheritance can result in fines and penalties. Because of that, it’s important to enlist the help of professionals like the CPAs for American expatriates at US Tax Help. That way, you can reach out to a trusted accountant with any questions if you receive a foreign inheritance while living abroad. Doing so can help you avoid consequences from the IRS.
Our CPAs Can Help You Report a Foreign Inheritance to the IRS
Knowing what to report to the IRS can be difficult, especially for American expats. For help reporting a foreign inheritance and filing United States taxes, visit our website or call the CPAs for American expatriates at US Tax Help today at (541) 362-9127.