Receiving an inheritance from a foreign relative can be a significant financial event, but it also comes with tax considerations and reporting requirements for US citizens and residents. Understanding how the IRS treats foreign inheritances and what forms you need to file is crucial to avoid penalties and ensure compliance with US tax laws.
Do you need to pay US Taxes on a Foreign Inheritance?
In most cases, you do not have to pay US income tax on an inheritance, regardless of whether it comes from a US or foreign source. The US does not impose an inheritance tax at the federal level, meaning the recipient does not owe tax on the amount received. However, certain tax implications may apply depending on the type of assets inherited:
- Foreign Real Estate – If you inherit a rental property, any rental income you earn must be reported on your US tax return.
- Foreign Investment Accounts – Any dividends, interest, or capital gains generated from inherited investments are subject to US taxation.
- Sale of Inherited Assets – If you sell an inherited foreign asset, you may owe US capital gains tax based on the difference between the sale price and the fair market value of the asset at the time of the original owner’s death.
- Foreign Inheritance Tax – Some countries impose inheritance or estate taxes. If you pay foreign inheritance tax, you may be able to claim a foreign tax credit on your US tax return to reduce your tax liability.
Even though you may not owe US tax on the inheritance itself, there are reporting requirements that must be met to avoid significant penalties.
Foreign Inheritance Tax Implications and Reporting Requirements
IRS Form 3520 – Reporting Large Foreign Inheritances
If you receive an inheritance from a foreign individual or estate exceeding $100,000, you must report it to the IRS using Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts).
- Filing Deadline: Form 3520 is due on the same date as your tax return (April 15, or October 15 with an extension).
- Penalties for Non-Compliance: Failure to file Form 3520 can result in severe penalties—typically 5% of the unreported amount per month, up to 25% of the total value of the inheritance.
FBAR & FATCA – Reporting Foreign Bank Accounts and Financial Assets
If your inheritance includes foreign bank accounts, investments, or financial assets, additional reporting requirements may apply:
- FBAR (Foreign Bank Account Report – FinCEN Form 114)
- Required if the total value of your foreign financial accounts exceeds $10,000 at any time during the year.
- Must be filed separately from your tax return through the Financial Crimes Enforcement Network (FinCEN).
- Form 8938 (Statement of Specified Foreign Financial Assets)
- Required under the Foreign Account Tax Compliance Act (FATCA) if the total value of your foreign assets exceeds:
- $50,000 (single) or $100,000 (married filing jointly) if living in the US.
- $200,000 (single) or $400,000 (married filing jointly) if living abroad.
- Required under the Foreign Account Tax Compliance Act (FATCA) if the total value of your foreign assets exceeds:
Failure to report foreign accounts can lead to steep penalties, including a $10,000 fine for not filing an FBAR and potential criminal charges for willful violations.
Capital Gains Tax on Foreign Inherited Assets
If you inherit foreign real estate, stocks, or other assets, selling them in the future could trigger US capital gains tax. The cost basis for tax purposes is generally the fair market value of the asset on the date of the decedent’s death.
If the foreign country imposes a capital gains tax upon sale, you may be able to claim a foreign tax credit to reduce double taxation.
US vs. Foreign Inheritance Tax Systems
US Estate and Inheritance Tax
- The US imposes an estate tax on the deceased person’s total assets before distribution, but only for estates exceeding $13.61 million (as of 2024).
- There is no inheritance tax at the federal level, meaning beneficiaries do not owe tax on what they receive.
- Some states impose their own inheritance or estate taxes, but these do not apply to inheritances received from foreign sources.
Foreign Inheritance Tax Systems
- Many countries impose an inheritance tax on beneficiaries rather than an estate tax on the deceased’s assets.
- Some countries have different tax rates based on the relationship to the deceased (e.g., children may pay lower rates than distant relatives or non-residents).
- If a foreign inheritance tax is paid, a tax treaty between the US and that country may allow a foreign tax credit to reduce double taxation.
Steps to take if you receive a Foreign Inheritance
- Determine if you need to file Form 3520 – If the inheritance exceeds $100,000, file Form 3520 by the tax deadline.
- Check for additional reporting requirements – If inherited assets include foreign bank accounts, investments, or trusts, you may need to file FBAR (FinCEN 114) and/or Form 8938.
- Assess potential capital gains tax liability – If you plan to sell inherited assets, determine the cost basis and whether any foreign tax paid can be credited against your US taxes.
- Consult a tax professional – Given the complexity of international tax laws, working with a tax expert familiar with foreign inheritances can help ensure compliance and minimize tax exposure.
Receiving an inheritance from a foreign relative comes with important tax and reporting obligations. While the inheritance itself is not taxable in the US, you may need to file Form 3520 and other financial disclosure forms. Understanding the differences between U.S. and foreign inheritance tax systems, as well as your reporting requirements, will help you stay compliant and avoid penalties.
