Do I Pay US Taxes on Foreign Inheritance to IRS? (5 Facts)

Do I Pay US Taxes on Foreign Inheritance to IRS? (5 Facts)

Is a Foreign Inheritance Taxable 

One of the most common questions that U.S. 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 who lives 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 living overseas or a foreign person nonresident alien.  If a person is a nonresident alien who bequests foreign property to a U.S. person, then that inheritance money is generally not taxable to the U.S. 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.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

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 who 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. 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

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

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.