If you have received an inheritance or a gift from a foreign individual or company within the past year then this article is for you. We will give you a run down of all you need to know surrounding foreign gift tax.
If you have received a gift/inheritance that is not cash, it is advised that you get a valuation of the asset in question. Whether it is a property, piece of art, or any other valuable item. This will allow you to understand the true value of the item, and if/when you sell it, you will be able to calculate the gain, if any, made on it.
Here are the common questions we hear when it comes to foreign inheritance and foreign gifts.
If I inherit money or property overseas, do I need to pay tax on it?
Inheriting money or property overseas relates to a US citizen or green card holder receiving an amount from a foreign person. A foreign person is anyone who is non-resident of the US. This also includes trusts that are set up overseas.
Inheriting money can be a confusing and difficult time for many. Between grieving and trying to plan for the future, the question eventually comes; what do I need to do with my inheritance? Do I need to pay foreign inheritance tax? Luckily, from an IRS standpoint, no tax needs to be paid on inheritance if you receive the money from a foreign estate or non-resident alien.
If you receive over $100,000 in inheritance, then you must declare the amount on Form 3520 “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts”. It will not be taxed, it is simply a declaration. Ensure that you do this, as the penalties can be quite significant.
What about if it is a gift?
Firstly, let’s define what the IRS constitutes a foreign gift to be.
“A gift is any amount received from a person other than a U.S. person that the recipient treats as a gift or bequest and excludes from gross income. A foreign gift does not include amounts paid for qualified tuition or medical payments made on behalf of the US citizen.”Source: https://www.irs.gov/businesses/gifts-from-foreign-person
If you are given money from a United States citizen as a gift, you do not have to declare it or pay tax on it. If you are given money from a non-US citizen as a gift, however, you do need to declare it on Form 3520 if it is over $100,000 in value. You will not have to pay tax on this, though. Again, it is simply a declaration. If you happen to receive money from a foreign corporation or partnership as a gift, and it is above $16,649 (2021), you will also need to fill out this form.
Inheritance and gifts are generally treated the same way in the eyes of the IRS. There is no limit on the amount that you can receive as a gift or inheritance.
What is Form 3520?
The purpose of Form 3520’ is to be an informational return that is included with your personal income tax return. You are able to file a joint form with your spouse, if applicable. If you fail to meet the deadline or fill out the form entirely, you could be charged 35% of your foreign inheritance or gift as a penalty fee. So it is very important! You may be happy to hear that the form does not require you to declare the identity of the donor, you must only declare the amount.
The IRS is mostly concerned with finding out about new assets that are entering the U.S. tax system and whether any of them may be potentially income generating and thus subject to US taxation moving forward.
Please note, some tax softwares will not provide Form 3520, so you may need to go directly through the IRS website. This form is due on April 15th for most taxpayers. You can find out more about this form here.
If I left my money in an overseas bank account, would it get taxed differently?
Initially, no. You’ll have to fill out Form 3520 as discussed. However, following this, you may have to fill out the FinCEN Report 114 (FBAR – Foreign Bank Account Report) if the balance of the account is $10,000 or over at any time during the tax year or IRS Form 8938 (Statement of Specified Foreign Financial Assets). If you earn any interest on this bank account, you’ll have to report it just as you do your US bank account interest on your income tax return.
What if I inherited or was given a foreign investment account?
If you have received an investment account such as a mutual fund, stocks, or ETFs, things get a little bit more complicated. You may even have to fill out annual forms even if no investments are bought or sold in that year. If this pertains to you, you’ll likely need to hire an accountant or tax advisor to help you with the next best steps.
I inherited a property overseas, I’ve filed out the 3520 form, but now I rent it out. Do I get taxed on this income?
Yes. If you are renting out your property you must declare and pay tax on this income when you file your personal tax returns. It will be taxed just like a rental property in the United States. You should note as well, if you decide to sell a property abroad, you may also need to declare the gains within your tax filings.
Can I open a bank account overseas?
Whether or not you can open an overseas bank account largely depends on the company in question. While most countries will have options for different types of bank accounts held by foreign citizens, they usually will have limitations on them and take time and research to figure out.
If you are given, or have inherited, a foreign bank account, though, the only US compliance you must do is form 3520. You may have to complete forms in the country of the bank though, depending on where it is.
Will foreign gift tax rules change?
In short, yes, these rules likely will change. There are new U.S. tax laws, such as the Foreign Account Tax Compliance (FATCA), that are putting more and more of a focus on offshore compliance. We can expect foreign financial assets to be more heavily scrutinized by the IRS in the coming years, and may even be taxed higher due to special U.S. tax laws relating to non-U.S. investments. It is always good to get a professional on your side to keep you up to date on these changes, making sure you are not missing out.
The good news is that whether you inherit or receive money or valuables from a foreign person, you do not need to pay tax on it. This can be a great step (or sometimes leap!) towards your personal financial goals. If you ensure you meet the requirements in the Form 3520, and keep on top of your assets that you may leave outside of the States, you will remain IRS compliant and can enjoy your inheritance or gift in peace.
If you did receive a sum of money and you are feeling unsure about next steps and would like to talk to a professional about it, get in touch with the Team at Cerebral Tax Advisors. We are here to help and make sure you are compliant and efficient, reducing the headache!