Foreign Inheritance Tax
Foreign Inheritance Tax: Oftentimes, a U.S. person‘s first introduction to the world of international tax law and how the IRS treats foreign income is when they receive a foreign inheritance. U.S. Person individuals include: U.S. Citizens Legal Permanent Residents, and foreign nationals who meet the substantial presence test. Typically, what sets the research in motion is when the taxpayer receives an inheritance from a relative in a foreign country. The first question (after imagining how to spend the money) is usually about how the IRS treats the foreign inheritance for tax purposes.
Let’s review the basics of foreign inheritance tax:
Is there a U.S. Foreign Inheritance Tax?
It depends, but generally no.
Let’s use an example.
Example of Foreign Inheritance Tax
Fred is a legal permanent resident who resides in the United States. He is originally from Taiwan and still has many family members in Taiwan.
Fred’s grandmother passed away a few months ago, and left him $800,000 (USD) of foreign money in a foreign bank account.
The money was transferred into a foreign bank account created by Fred’s parents using Fred’s “stamp.” That foreign inheritance was transferred from Fred’s Grandma’s Estate Account into his Taiwan Bank Account.
Is the Inheritance from Overseas Taxed?
In this situation, the answer would be “No.”
That is because Fred’s grandma is a foreign person and all of the money is foreign sourced.
If instead, a portion of the inheritance included U.S. situs, the outcome may be different — but so far so good for Fred.
Is Income Generated from the Inheritance Taxed?
While there is no inheritance tax on the actual inheritance, there is income tax on the income accrued on the account after it was received by Fred.
The income generated from the inheritance is not the inheritance, but rather new income — and therefore it is taxable.
Is this a Reportable Gift?
That is because Fred, a U.S. Person, received a gift from a foreign person individual that exceeded the Form 3520 threshold if $100,000.
FBAR & FATCA Reporting
Since Fred had ownership of a foreign account, and the account exceeded the FBAR and FATCA reporting requirements, he must be sure to file his timely FBAR and FATCA forms for the year he had the account — and every thereafter in which he exceeds the threshold for reporting.
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