- 1 Is a Foreign Inheritance Taxable
- 2 Estate vs Inheritance Tax (Federal Level)
- 3 Taxation vs Reporting
- 4 NRA (Non-Resident Alien) vs US Person Living Abroad
- 5 Are the Assets Located in the US or Abroad?
- 6 Do the Inherited Assets Generate Income?
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Golding & Golding: About Our International Tax Law Firm
Is a Foreign Inheritance Taxable
One of the most common questions that US persons have when they receive an inheritance from a foreign person is whether or not that inheritance is taxable by the IRS. This is a very complicated question because it is impacted by various factors such as whether the foreign person is also a US person who lives overseas; are the assets located in the United States or abroad; does the inheritance generate income. Let’s take an introductory look at whether a foreign inheritance is taxable or not in the United States.
Estate vs Inheritance Tax (Federal Level)
It is important to distinguish between an estate tax and an inheritance tax. The US government follows an estate tax model –– although some states also have an inheritance tax. The reason why the distinction is important is for tax purposes. Namely, with the estate tax, it is not the recipient who (directly) pays the tax, but actually, it is the estate that may be taxed by the US government.
Taxation vs Reporting
The first important aspect of foreign inheritances is to distinguish between the taxation rules and the reporting rules. From a reporting standpoint, when a US person receives a gift or inheritance from a foreign person they have to file a Form 3520 if they meet the threshold filing requirements. Conversely, if it is a US person that is living overseas (or in the US) with foreign assets, then the estate files Form 706. Compared to the reporting requirements for a foreign inheritance, the taxation rules are much more complicated.
NRA (Non-Resident Alien) vs US Person Living Abroad
An important distinction must be made between whether it is a US person that is living overseas or a foreign person nonresident alien. If a person is a nonresident alien who bequests foreign property to a US person and that is generally not taxable to the US person. If it is a non-resident alien that bequests property located in the United States to a US person, the estate generally only has a $60,000 exclusion before estate tax kicks in — and the estate tax can be significant as to the US portion of the estate. If it is a US person resides overseas they are generally still entitled to the nearly $13 million exclusion. This means that the entire state, domestic and foreign would not be taxable until the value is $13 million — subject or whether any gifts were given during their lifetime.
*Domicile issues may contribute to tax implications for certain US persons residing abroad.
Are the Assets Located in the US or Abroad?
When a non-resident alien bequests foreign property to a US person, it is generally not taxable in the United States. While there are exceptions, exclusions, and limitations — the general proposition is that if it is a non-resident alien, a non-US person with foreign assets, then a bequest of those foreign assets to a US person does not make the inheritance taxable. Conversely, when the non-resident alien bequests US property to a US person, it may become subject to significant tax liabilities in the US.
Do the Inherited Assets Generate Income?
One ancillary issue to keep in mind is that even if the actual assets themselves are not subject to the estate tax because it is a non-resident alien who bequests non-US property if the assets then generate income and it is received by a US person — then in the future the US person may have to pay income tax on the income generated. Stated another way, when a non-resident alien bequests non-US property, while it may escape estate tax — any income generated from the asset after the person passed away would become income tax to the US Person owner of the asset.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.