Many US persons (US Citizen, Green Card Holder, Resident Alien) have a concern if they received an inheritance from a foreign relative which is a non-US citizen living abroad, they will pay taxes or not?
Answering this question, we could say No in most cases. However, you may have to report it to the IRS while filling your regular federal tax return. So, if you are a US person who receives an inheritance from a non-US person, in general, the IRS doesn’t obligate the receiver to any taxes, the only exception if the inheritance in the form of assets is.
What is the US situs?
The US Situs means that the assets are in form of noncash assets or tangible property, that is in the US. In that case, this property is subject to a tax of 40% from the asset value, which requires filing Form 706-NA.
How could you report your foreign inheritance?
Even if, you are not subject to paying taxes upon your foreign inheritance, you still need to report about them using different forms based on different circumstances will expose them below. The Amount Received is equal to or more than $100,000.
If the US person received more than $100,000 even if it was a gift or inheritance from a non-US person, he/she should report about it using Form 3520 “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” while filing their annual income tax return. Following the same Filling deadline calendar, April 18, or June 18 for those who are living put the US.
Furthermore, the good news about Form 3520 is that it is an informative form nontaxable form. This means any information mentioned in that form is nontaxable. But if you didn’t file the form, or filed it incorrectly, you may be subject to a penalty of up to 35% from the gross value of the inheritance or gift.
However, the amount received in one time or complained during the year.
For example, if you received a gift from a non-US person equal to $20,000 and during the same year you got an inheritance from the non-US person as well valued at $80,000. So you are applicable to file Form 3520 to report about the sum of gifts and inheritance received during the same year which is valued at $100,000.
When should I file Form 3520-A for Foreign Trusts?
If the received foreign inheritance was part of a foreign trust, the US person must make sure that the foreign trusts filed the form 3520-A, or if they failed to file it you have to do it on your own by the deadline of March 15. Similarly, it is Informative form as Form 3520 which means no tax liabilities, but if you failed to file it you may be subject to a penalty which is $10,000 or 5% from the gross value of the gift or inheritance as well.
What happens if I kept the money in the bank?
If the US person decided to keep the received gifts or inheritance in a bank account and that amount is more than $10,000. Meanwhile, you should report that bank accounts once they exceed the $10,000 by filing FBAR (Foreign Bank Account Report) using FinCEN form 114, which is also an informative report and will not be subject to a tax liability by the deadline of April 15, or if you missed it, you got an automatic extension up to Oct 15, without any late penalty. However, if you failed to file the FBAR while you may be subject to different penalties you can check FBAR filing and its banalities.
In case of transferring the foreign inheritance to a US Bank Account.
If you transferred the received foreign Gifts or Inheritance to a US bank account and the amount exceeds the $10,000, you will be required to file FinCEN Form 104.
Statement of Specified foreign financial assets Forms 8938.
If you as a US person received an inheritance valued at over $200,000, you must file Form 8935 depending on your filing status. If your filing status is single and living outside the US you will be required to file Form 8938 if your combined assets value more than $200,000 on the last day of the Tax year or $300,000 on any day of the same tax year. For more information read about Form 8938 Instructions.
In conclusion, in most cases as a US person who received a foreign Inheritance or Gifts from a non-US person you don’t subject to pay US taxes, but you are required to report about the received value in any type.
But in case you gain profit from investing by the received gifts or inheritance, you now are subject to the US Taxes Law by the IRS as usual.
So, if you need any help to know more about your situation or ask for tax advice, please don’t hesitate to contact us and ask for a free consultation.