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Receiving Foreign Inheritance and US Estate Tax

Receiving Foreign Inheritance and US Estate Tax
Ines Zemelman, EA
25 December 2012

It’s holiday season and many are feeling cheerful and full of the ‘giving-spirit’. Perhaps you even have a foreign relative who is feeling particularly magnanimous and includes you in their will. How will this affect your US taxes? The following article will examine this issue in detail. 

A foreign inheritance is only subject to US Estate Tax if it is left by a US Citizen or a legal resident of the United States.

There are other conditions which may constitute taxation, and we will discuss these in further detail. Before we go on to observe various rules and regulations, we find it necessary to note that California residents are exempt from local taxation, but may still be required to file federal taxes on specific types of inheritance from abroad with various circumstances. 

Any US resident who owns foreign accounts and property must report them when they file US taxes – whether or not they provide any income.

Failure to report foreign account balances could result in punitive damages up to and including imprisonment. You must also include property which is located or was transferred in the United States. This type of property is subject to taxation and is referred to as situs property. 

There are 2 very common questions receive from clients in regard to foreign accounts and foreign inheritance in general. They are: “Do I owe state taxes on my foreign inheritance?” and “If I have a foreign inheritance and I transfer that money will I be subject to taxes?” 

To answer these questions directly… 

Foreign inheritance may be taxed under the following circumstances:

  • The donor (the person from whom you’re inheriting) is a permanent resident or citizen of the United State...In this case, the donor’s worldwide estate may be taxed under US tax code.
  • The estate is inclusive of U.S. situs property…In this case only the US situs property may be taxed.

Money you transfer from a foreign inheritance may not be subject to taxation, but you’re still required to report it. If one of the 2 above conditions applies, you will owe taxes on your inheritance. If neither applies, you simply need to report it for transparency. 

Instead of taking it upon yourself to determine whether or not you owe taxes, you may be wise to consult with an tax professional before filing your taxes to ensure you’re meeting all of your tax obligations.  

While you may not have to pay taxes on your foreign inheritance, you may be required to pay taxes on income earned from foreign transactions.

Are you wondering why this is such a big deal? The reality is that in more recent years the IRS has been seriously tracking those with foreign accounts who failed to report them on their taxes. In some cases, individuals are being criminally charged for falsely reporting information. Others are being penalized severely monetarily for not having reported overseas accounts, even if they would not have originally owed taxes on such accounts. 

You don’t want to be unknowingly breaking the law because you’re not familiar with the entire tax code and how it applies to your specific situation. 

If you receive a foreign bank account as a portion of your foreign inheritance you must report it on the FBAR and possible FATCA. We understand how it would be easy to assume it wasn’t necessary, but make no mistake about the severity of not claiming it on your United States taxes.

Ines Zemelman, EA
founder of Taxes for Expats