Do You Owe US Taxes on a Foreign Inheritance? What US Expats Need to Know
Receiving an inheritance has tax implications – particularly if you inherit an asset from someone outside the US. Since US expats have more complex reporting requirements than US citizens who reside stateside, you might wonder how to handle reporting a foreign inheritance.
If you’re a US expat or tax resident, here’s everything you need to know about how the Internal Revenue Service handles foreign inheritance taxes.
Foreign Inheritance Reporting Requirements for US Expats
You don’t always have to report a foreign inheritance to the IRS – but it’s required in some situations. Keep in mind that reporting your inheritance doesn’t automatically mean paying tax on it, so even if you don’t expect to owe tax, you may still have to report your inheritance if any of the following scenarios are true:
1. Your inheritance is from a non-US person and is valued at $100,000 or more
If you, a US person, receive an inheritance with a fair market value of $100,000 or more, you must file a disclosure to report it. The disclosure, Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) must be submitted by June 15th, for those who reside outside of the US.
The $100,000 threshold may include multiple gifts or inheritances individually valued at less than $100,000 from one source or a related party of that source throughout the tax year, but which in total reach $100,000 during the year.
For example, if you received multiple gifts or inheritances separately throughout a tax year from a single non-US source, which in total are over $100,000 you would be required to report and define them on Form 3520.
On the bright side, you are not paying taxes by filing Form 3520 but only reporting your inheritance. Form 3520 is an informational form you must file since neglecting to do so can result in steep penalties. Some as high as 35% of the gross inheritance or gift.
2. Your inheritance brings the value of your offshore financial assets to over $200,000
Regardless of the amount of your foreign inheritance, if it increases your foreign financial assets to $200,000 or more as someone who resides abroad, the IRS requires you to file Form 8938, Statement of Specified Foreign Financial Assets with your annual US tax return. If you’re married and file jointly, this amount increases to $400,000.
What’s Considered a Specified Foreign Financial Asset?
Generally speaking, a specified foreign financial asset is any financial account you may have at a foreign financial institution. This includes:
- – Financial accounts that are maintained by foreign financial institutions (i.e. bank accounts, investment accounts, retirement accounts, and mutual funds.
- – Stock, bonds, or securities issued by a non-US person
- – Any interest in a foreign entity, including; a foreign corporation, foreign partnership, or foreign estate or trust
- – Any contract or financial instrument with an insurer or counterparty that is a non-US person
- – Personal residences and rental properties held by a foreign partnership, corporation, trust, or estate
Remember that the complete set of rules is slightly more complicated and varies depending on whether you live abroad or in the US. For those who reside abroad, you must file the form if you’re unmarried (or married filing separately) and your offshore assets equal or exceed $200,000 on the last day of the tax year, or else they exceed $300,000 on any other day of the year. Married filers must file this form if their offshore assets exceed $400,000 on the last day of the year or $600,000 on any other day.
You’ll submit Form 8938 with your tax returns. If you don’t submit it on time (June 15th for most US expats), the IRS could charge you a penalty of up to $10,000 and additional monthly late charges of $10,000 (though the penalty won’t exceed $50,000).
3. Your inheritance is placed in a foreign trust
If your inheritance is placed in a foreign trust you may need to file to report ownership of the trust. In general terms, the IRS treats the beneficiary of a foreign trust as an owner for US tax reporting purposes. The IRS requires the trust to file Form 3520-A (Annual Information Return of Foreign Trust with a US Owner) by March 15th. This form is due before your US tax returns and carries penalties starting at $10,000, so it’s not one to miss.
However, if the trust doesn’t file this form, the US person whose name is on the trust (which is possibly you as beneficiary) must file Forms 3520 and 3520-A when they submit their tax returns. In most cases, you won’t owe any money – though the IRS could charge you a penalty if you do not file on time.
4. Your inheritance is moved into your foreign bank account
You don’t automatically have to report your inheritance when it hits your foreign bank account. However if the inheritance is $10,000 or more – or if it brings your bank account balance to over $10,000 – the US Treasury requires reporting. In this case, holding more than $10,000 in a foreign financial account means filing a Report of Foreign Bank and Financial Accounts (FBAR) after the end of the tax year and submitting it to the US Financial Crimes Enforcement Network (FinCEN).
The FBAR does not drive any tax but does let the US Treasury know where you hold your money abroad. Your FBAR is due April 15th, but if you miss this date, the deadline is automatically extended to October 15th – without a penalty or an extension request required.
5. Your inheritance is transferred to a US bank account
If you move your foreign inheritance into a bank account based in America, the US requires the bank to file FinCEN Form 104 (Currency Transaction Report). The bank may ask you some questions about the source of the funds, or other supplemental information in order to prepare this form related to the transfer of funds into your US-based account.
When travelling with large amounts of money, the US will require you to file FinCEN Form 105 (Report of International Transportation of Currency of Monetary Instruments) at the time of entry or departure with the Customs officer in charge. Please note – the form must be filed within 15 days of receipt of funds. If you’re entering the US with more than $10,000 in hand (or pocket), you’ll be asked to complete this form when entering the US by the customs officer in charge at the airport, if you’re arriving by plane.
Alternatively, if you are not travelling with the currency when you enter or depart the US, the form can be filed by mail on or before the day of travel. This helps the US Government determine where the money came from to prevent money laundering.
Do US expats owe taxes on foreign inheritances?
Despite the reporting requirements, if you receive an inheritance from someone who passed away, you typically are not required to pay US taxes on the amount received. This is because the US applies tax to the estate of the person who passes away, rather than to the recipient of the inheritance. If the person who passes away is not a US taxpayer, the IRS does not have the authority to tax their foreign estate. There is an exception if the inheritance received is considered a US situs.
A US situs generally refers to a tangible asset that resides in the US. For instance, if you inherit a home or plot of land, this would be considered a US situs. The property or estate would therefore be subject to US taxes. Other things considered a US situs include business assets in the US and stock in US corporations.
Bright!Tax Can Help You Figure Out if You Owe Inheritance Taxes
Managing your US tax requirements as an expat is tricky. If you received a foreign inheritance and aren’t sure if you should file taxes or if you owe any money, Bright!Tax can help.
We work with US expats daily to prepare their tax returns, file FBARs, meet business tax filing requirements, and answer questions on US tax rules. We’ll help you understand if you’re on the hook for any US taxes for your inheritance.