What is the U.S. tax on Inheritances from a Non-U.S. Person to U.S. Person?

We get this question a lot…

It is important to stress that there are no U.S. taxes owed by a U.S. citizen or green card holder directly on receiving any inheritance (whether received from a U.S. or non-U.S. person). However, there are IRS informational reporting requirements when receiving a gift or inheritance from a non-U.S. person (non-resident alien and/or non-U.S. domiciled). More importantly, ownership of foreign financial assets creates other U.S. tax reporting issues that must be properly handled or there may be a risk of significant IRS penalties and large fines. Three very common U.S. tax questions on receiving an inheritance from abroad:

  1. Do U.S. taxpayers pay tax on inheritance money from overseas? No.
  2. How much money can you receive as a gift from overseas? Unlimited.
  3. What IRS tax form do I need to file if I received a gift or inheritance from a foreigner? IRS Form 3520.

Although there are no U.S. taxes or restrictions on U.S. citizens, green card holders, or taxpayers from receiving non-U.S. assets, all bequests and gifts received by U.S. persons from foreign persons that exceed $100,000 in a calendar year must be reported to the IRS on Form 3520 (“Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”). The amount and description of the bequest must be disclosed on Form 3520, but the IRS does not require disclosure of decedent or donor’s identity. The IRS is mostly concerned about knowing what new assets are entering the U.S. tax system and the possibly income generated by these non-U.S. assets that would be subject to full U.S. taxation going forward (often with international reporting requirements).

It is essential to properly file a timely IRS Form 3520 to report a foreign inheritance or foreign gift received by a U.S. person as large penalties may be imposed on a taxpayer if the IRS later discovers that an inheritance was not properly declared when received using Form 3520. As one will see throughout this article, the IRS has a keen interest in learning about U.S. taxpayers receiving foreign assets and the continued reporting of income from these non-U.S. assets. The initial reporting of a foreign inheritance on IRS Form 3520 is a mandatory starting point and absolutely critical to complete in a timely fashion.

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