Inheriting Money from Abroad? What the IRS Says About Foreign Inheritance Tax

Inheriting cash or a flat in another country feels like winning the life lottery—right up until you remember the IRS has opinions. Here’s the good news: there’s no separate foreign inheritance tax under U.S. law. The less-good news: there are rules, forms, and deadlines, and the IRS would very much like you to follow them.

Here’s your calm, coffee-in-hand walkthrough. We’ll cover when a foreign bequest is simply yours to keep, when you need to report it, how inheritances tied to foreign trusts are treated, and what to do when those assets come with offshore bank or investment accounts—just what U.S. taxpayers need to stay compliant without losing a weekend to acronyms.

Is there a foreign inheritance tax in the U.S.?

An inheritance from a foreign country doesn’t trigger a special U.S. “foreign inheritance tax.” If you receive money or property from a non-U.S. person or a foreign estate, the bequest itself isn’t income and doesn’t land on your U.S. income tax return just for showing up.

Where U.S. tax actually appears is after you own the asset—when it earns money or when you sell it.

• Income after inheritance: Rent from inherited real estate, dividends on overseas shares, and interest from foreign accounts are taxable under normal U.S. income tax rules.
• When you sell: Later disposal of the asset is subject to U.S. capital-gains rules (often using a stepped-up basis as of the date of death).

You may still face taxes abroad. Some countries levy their own inheritance or estate taxes. Depending on the facts, a treaty or coordinated relief can reduce overlap—worth checking before you distribute or sell.

Do I need to report foreign inheritance to the IRS?

An overseas inheritance can be non-taxable and still reportable. The IRS wants visibility when large amounts cross borders—think “tell us,” not “pay us.”

When reporting is required (the threshold and timing)

• File Form 3520 if total receipts from a foreign person or foreign estate exceed $100,000 in a single tax year.
• Combine cash and property from the same or related donor(s) to test the threshold.
• File it by your individual return due date for that year (extensions generally extend Form 3520 as well).
• Skipping or botching it can trigger steep penalties—yes, even with no tax due.

What to file depends on how you received it

• Direct bequest from an estate or individual: Usually Form 3520 only (informational; not a tax bill).
• Via a foreign trust: You file Form 3520; the trustee typically files Form 3520-A. If you’re treated as an owner or ongoing beneficiary, expect annual trust reporting thereafter.
• Via a foreign corporation/partnership: Often treated as a distribution, not a gift—different rules and forms may apply. Don’t assume “inheritance” automatically equals “no report.”

Foreign bank account disclosures

If the inheritance includes foreign bank or investment accounts (or you gain signature authority), you may also need:

• FBAR (FinCEN Form 114) and/or
• FATCA Form 8938 (if thresholds are met).

These are disclosure filings; failing them is classic non-compliance territory.

How much can a U.S. citizen inherit tax free?

For U.S. income tax, there’s no dollar cap—the inheritance itself isn’t income. You can inherit any amount from a non-U.S. person or foreign estate and owe $0 U.S. income tax just for receiving it. The IRS only cares later if the asset earns money or you sell it.

What can still bite (just not you personally at receipt):

• U.S. estate tax is on the estate, not the heir. If the decedent was a U.S. citizen/resident, any federal estate tax above the exemption is paid by the estate before distributions.
• Foreign countries may levy inheritance/estate taxes. Those can reduce what reaches you; treaties or credits may help.

Two planning notes for after you inherit:

• Step-up in basis. Inherited property generally resets to fair market value on the date of death, shrinking future capital gains if/when you sell.
• Income after the fact is taxable. Rent, dividends, and interest from inherited assets are taxed under normal U.S. rules.

Tax implications of inherited assets from abroad

The inheritance itself may be tax-free, but once the assets are yours, the after-inheritance life begins. The rule of thumb: report what it earns, disclose what exists, and track basis so future gains use the right number.

• Foreign accounts (banks, brokers): If the total value of non-U.S. accounts crosses the thresholds, file FBAR (FinCEN Form 114) and, if applicable, FATCA Form 8938. These are disclosures, not tax—but skipping them gets pricey.
• Foreign business or corporation: Ownership in a non-U.S. entity can trigger informational returns (e.g., 5471/8865/8858, depending on structure). Dividends and other income are taxed annually at your U.S. tax rate; certain ownership levels bring extra international rules.
• Foreign property (real estate): Net rental income is U.S.-taxable each year after expenses and depreciation. When you sell, U.S. capital-gains rules apply, typically using the stepped-up basis from the date of death.
• Foreign trusts: Inherited interests often mean Form 3520 (and the trustee’s 3520-A). If you’re treated as an owner or ongoing beneficiary, expect continuing annual reporting.
• Annual income reporting: Interest, dividends, rent, and other post-inheritance income go on your U.S. return each year—separate from any one-time inheritance filing.

How do I report a foreign inheritance?

“Not taxable” doesn’t mean “invisible.” When money or assets cross a border into your lap, the IRS and Treasury want a tidy paper trail. Here’s the clean, do-this-then-that version:

• File form 3520 if total receipts from a foreign person or foreign estate exceed $100,000 in a tax year (one-time inheritance notice; steep penalties if missed).
• File an FBAR (FinCEN 114) if your aggregate foreign account balances exceed $10,000 at any time during the year (separate Treasury reporting requirement).
• File form 8938 (FATCA) if your foreign financial assets cross the applicable thresholds (a second, IRS-side disclosure; thresholds vary by filing status and residency).
• Report income on your Form 1040. Rent from foreign property (Schedule E), dividends/interest from overseas accounts (Schedule B), and capital gains when you sell inherited assets (Schedule D using stepped-up basis—hello, capital gains tax math).
• Claim the Foreign Tax Credit (Form 1116) when you’ve paid foreign tax on the same income, so you don’t get taxed twice.
• Match dates and amounts across forms (3520, FBAR, 8938, 1040)—consistency is half the battle with these reporting requirements.
• Check your state return (e.g., New York) for any add-on rules; states don’t always mirror federal treatment.

That’s it: one inheritance notice, the right account disclosures, and your regular annual return for whatever the assets earn. Keep the paperwork tidy and the IRS stays happy.

Special rules for expats and residents abroad

Living overseas doesn’t put you outside U.S. tax law—it just adds a second rulebook. If you’re a U.S. citizen or green card holder abroad, you’ll follow U.S. filing rules and your local inheritance laws, then make the two play nicely.

• You still file in the U.S.: Worldwide income goes on your 1040, and reporting obligations for foreign gifts and inheritances still apply (e.g., Form 3520 when over $100,000).
• Accounts come with disclosures: If inherited financial accounts push you over thresholds, file FBAR and—if applicable—the Statement of Specified Foreign Financial Assets (Form 8938). These are disclosures, not taxes.
• Non-resident alien decedents: When a non-resident alien leaves assets to a U.S. beneficiary, U.S. income tax generally doesn’t hit the receipt—but reporting can. Watch for trusts, corporations, or accounts that change the form stack.
• Treaties help, but only if you use them: Estate/inheritance treaties (or income-tax treaties) may reduce foreign tax or coordinate outcomes. You’ll still need to claim benefits correctly on your U.S. return.
• Local law matters: Civil-law countries can impose forced-heirship or local inheritance taxes that affect what you receive—and when. Coordinate timing before you distribute or sell.
• When to get help: If your inheritance touches a trust, a company, multiple countries, or large financial accounts, get tax advice from someone who handles cross-border estates regularly. It’s cheaper than learning by penalty letter.

Keep the windfall, skip the penalties

There’s no U.S. “foreign inheritance tax,” but the after-party is real: Form 3520, FBAR/8938, basis records, and the occasional treaty twist. Get those right and your inheritance stays what it should be—a gift, not a migraine.

If you’d like a calm, done-right walkthrough—what to file, when to file it, and how to keep every dollar compliant—get in touch with Bright!Tax. We’ll map your forms, file what’s needed, and turn “I hope this is right” into “it is.”

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