Tax Consequences of an Inheritance from Relatives Overseas
If you receive an inheritance from a relative overseas, you may think federal and state taxes don’t apply. However, getting a foreign inheritance isn’t always simple for American recipients and can have consequences.
When you receive an inheritance from relatives overseas, things can get complicated. Whether your relative was an American expat or not is a factor and so is whether or not they held assets in the United States. Regardless, American recipients don’t have to worry about paying federal inheritance tax, although their state of residence may impose an inheritance tax of its own. Even if you don’t have to pay taxes on your inheritance from a relative overseas, you will likely have to report it to the IRS. If you don’t, you’ll face steep financial penalties.
At US Tax Help, we’re dedicated to assisting American citizens with their tax needs, domestically and abroad. To learn more about the tax accountants for American expatriates at US Tax Help, call us today at (541) 362-9127.
Receiving an Inheritance from Relatives Overseas
If you’ve recently received a foreign inheritance from an overseas relative, you may be concerned about the tax implications. Generally, the IRS heavily taxes an inheritance before it is passed on to a beneficiary. However, when it comes to receiving an inheritance from a foreign relative, it gets a bit more complicated. The first thing to consider when receiving an inheritance is the citizenship status of your relative overseas.
Expat Relatives
Just because your relative lived overseas, that doesn’t mean they are not an American citizen. When an expatriate retains their American citizenship, they still have to abide by many IRS rules. If your inheritance from an expatriate relative includes assets in the United States, known as U.S. situs property, those assets will likely be taxed. Expatriation doesn’t absolve relatives living overseas from IRS rules, meaning their estates may be taxed before being passed onto you. If you are receiving an inheritance from an expat relative overseas, it’s helpful to seek guidance from a tax accountant for American expatriates. That way, you can learn how your expat relative’s estate may be taxed before you receive your inheritance.
Foreign Relatives
If you received your inheritance from a foreign relative living overseas, it is unlikely that there will be tax consequences. As an inheritance recipient who is a United States citizen, you are generally protected from paying federal estate tax yourself, whether you live domestically or abroad. If your foreign relative has assets in the United States, that portion of their estate will be taxed by the IRS before you receive the inheritance. If not, you will receive your inheritance tax-free. That being said, your foreign relative’s country of residence may have its own laws regarding inheritance tax, so it’s still important to consult with an experienced CPA.
State Tax Consequences of Inheritances from Overseas Relatives
While there is no federal inheritance tax for American recipients, some states do impose an inheritance tax. Whether or not you will have to pay an inheritance tax on an inheritance from a relative overseas will largely depend on the state you live in.
Regarding inheritances, there are two types of taxes. The first is an estate tax imposed on the estate itself and not on the recipient. The second is an inheritance tax, which the recipient is responsible for paying. There is no federal inheritance tax in the United States, meaning an estate is responsible for paying any taxes. However, some states impose an inheritance tax on recipients, and others also have an estate tax. The following are states that levy an inheritance tax on recipients:
- Delaware
- Iowa
- Kentucky
- Nevada
- New Jersey
- Pennsylvania
Notably, Maryland has both an inheritance tax and an estate tax. Because of this, it is crucial to speak with an experienced CPA upon receiving an inheritance, even from a relative overseas. If you are an expat yourself, you may still be responsible for paying state inheritance taxes if you hold property in your current state of residence, so it is wise to consult a tax accountant for expatriates. This is especially true if your overseas relative was an American expatriate as well.
Are There Consequences for Not Reporting an Inheritance from Relatives Overseas?
Regardless of whether your state has an inheritance or estate tax, or your overseas relative was an expatriate or not, you may still have to report your foreign inheritance to the IRS. Even if a recipient of an estate owes no taxes on the state or federal level, failure to report an inheritance could result in substantial financial penalties.
If you received an inheritance from an overseas relative who was not an American citizen, you might need to file IRS Form 3520. Recipients only have to complete this form if they received an inheritance of a value greater than $100,000 from their foreign relative.
Generally, inheritances aren’t viewed as taxable income in the eyes of the IRS. However, some types of inheritance incomes, like qualified retirement benefits, are. These types of incomes are reported as inheritance income in respect of the decedent and would likely only come into play if your overseas relative was an American expatriate.
Reporting your inheritance to the IRS gets more complicated when your relative was a U.S. citizen living overseas, so recipients should seek help from a tax accountant for American expatriates. It’s important to report your inheritance properly on the state and federal levels so you don’t face unnecessary financial penalties.
Failure to report inheritances, even foreign inheritances held in a foreign account, can result in substantial financial penalties from the IRS. Failure to file IRS Form 3520 can result in a penalty that is 5% of your total inheritance for each month that you do not report your foreign inheritance for up to five months. A similar penalty will be imposed on recipients who fail to report their inheritance from an expat relative living overseas.
Call Our CPAs to Learn More About Foreign Inheritances Today
If you’ve received an inheritance from an overseas relative, you need to know about the potential tax consequences. To learn more about the tax accountants for American expatriates at US Tax Help, call us today at (541) 362-9127.
