The Estate Tax for US Expats Explained

Inheriting an estate can be an emotional, complicated process. Unfortunately, there’s more room for confusion when inheritors live abroad. If you’ve recently inherited an estate as a U.S. expat, it’s important to know how estate taxes may affect you.

United States expats who inherit estates from foreign relatives don’t need to pay estate taxes to the IRS. If you live abroad and inherit an estate from an American relative, you must report it to the IRS. You may also be responsible for paying estate taxes if the estate’s value is above a certain amount. Failure to file the proper forms with the IRS and pay an estate tax liability can result in severe consequences. That’s why hiring an experienced tax accountant to guide you through the process is wise, especially if you live abroad.

We’re here to help you understand your estate tax liability to the IRS as an American living overseas. To learn more about the tax CPAs for American expatriates at US Tax Help, call today at (541) 362-9127.

Do US Expats Need to Pay an Estate Tax on Foreign Inheritances?

If you live abroad and recently inherited an estate from a foreign loved one or friend, you may be wondering if the United States can impose taxes on the transfer of property. The short answer is no. However, you may be liable for taxes imposed by the foreign relative’s country of residence.

Generally, the IRS does not impose taxes on foreign inheritances of estates. That means if you live abroad and inherit an estate from a foreign family member, you likely won’t have to pay estate taxes to the IRS.

That said, other countries have their own rules regarding taxing the transfer of property from one person to another, so it’s important to consult a tax CPA for expatriates for clarification on your tax liability. You may be responsible for paying estate taxes to a foreign government, depending on the rules or your foreign relative’s country of residence.

How Does the Estate Tax Affect US Expats Who Inherit Estates from Americans?

Just because you now live overseas doesn’t mean you don’t maintain relationships with loved ones and family members that reside domestically. If, as a U.S. expat, you inherit an estate from a recently deceased loved one, you need to know how estate taxes will affect you.

Generally, estate taxes are paid by the decedent’s estate, not the beneficiary. However, if you’ve inherited a loved one’s estate while living overseas, it’s your responsibility to oversee estate taxes. If your newfound responsibility is to manage a loved one’s estate after their passing, and they lived in the United States while you live abroad, you should learn what that will entail.

In the United States, estate taxes are imposed upon property transfers to inheritors. It doesn’t matter if you live abroad or domestically, as the IRS imposes similar rules on residents and expats alike. If you inherited an estate from a deceased loved one as an expat, you’ll be liable for paying the imposed taxes through the estate. However, there is an exemption. In 2022, the lifetime gift and estate tax exemption has increased to $12.06 million. If you’ve inherited other estates in your life, or your recently inherited estate is valued above the exemption threshold, you’ll likely have to pay estate taxes. Generally, the estate tax ranges from 18% to 40%, depending on the estate’s value.

While you may not have to pay estate taxes upon a property transfer, you may still have to notify the IRS of your inheritance. This can get complicated for U.S. expats who are far from family and friends who can help. Because of that, Americans living abroad can benefit from hiring a tax CPA for American expatriates to help them understand their potential estate tax liability and the necessary steps to take.

How Do I Report Estate Taxes as a US Expat?

If you’re a U.S. expat living overseas and inherit an estate from an American or foreign relative, you’ll likely need to report it to the IRS. If you have a tax liability, the paperwork can become complicated quickly. That’s why it’s wise to hire a tax CPA for American expatriates so that you can start off on the right foot when managing an estate.

Reporting Foreign Inheritances

While you likely won’t have to pay estate taxes in the United States if you live abroad and inherit a foreign estate, you may have to report it. Generally, American expats who inherit an estate valued above $100,000 must report it to the IRS using Form 3520. This is simply for informational purposes, not tax reasons.

Reporting Domestic Inheritances

Reporting domestic inheritances can be difficult for Americans living overseas. Generally, expat inheritors need to use IRS Form 706 to report an estate and any necessary taxes. This form is often due within nine months of a loved one’s passing, although inheritors can file for an extension in some cases. After filing Form 706, expats who inherit an estate from an American family member must file IRS Form 1041 annually.

It’s also important to note that you may have to report your inheritance to the state in which your deceased loved one resided. This calls for more paperwork, so hire an experienced tax CPA for American expatriates to guide you.

Can US Expats Face Penalties for Not Reporting Inherited Estates?

Reporting a recently inherited estate, even if you don’t have to pay estate taxes, is crucial. If U.S. expats don’t properly report and pay taxes on an inherited estate, they can face steep financial penalties from the IRS.

U.S. expats who inherit an estate from a foreign loved one and fail to report it to the IRS can face financial penalties. This is the case even though expat inheritors of foreign estates don’t have a tax liability to the IRS. The minimum financial penalty for failure to file IRS Form 3520 is $10,000. There are also serious financial penalties for expats who fail to file IRS Form 706.

Remember, you may also face financial penalties if you’re required to report an estate inheritance to a foreign country and fail to. Because of the risk of incurring financial penalties, and the complications surrounding reporting a recently inherited estate, it’s wise to consult a tax CPA for American expatriates to better understand your responsibilities.

Call Our Tax Accountants to Learn More About Estate Taxes for Expats

If you’ve inherited an estate as a U.S. expat, you can benefit from reaching out to a tax accountant for help. To learn more about the tax CPAs for American expatriates at US Tax Help, call today at (541) 362-9127.