Maybe you didn’t know you had an Aunt Sally in Europe who died and left you as sole recipient of her estate. People joke about inheriting large sums of money from long lost relatives in far off places, but when it actually happens, you may be glad to know that, for the most part, your inheritance from Aunt Sally is tax free at the federal level. However, state and certain federal tax implications may come into play if the monies, and Aunt Sally, fall into certain categories.
The Internal Revenue Service collects estate tax on property or money you might transfer upon your death. However, the IRS does not levy estate tax on inheritance that comes from foreign soil. Before you get excited, though, some states do. If you are the recipient of a foreign inheritance, even though federal taxes aren’t applicable in most cases, you are obliged to report it on your federal tax return. To be sure of your state's requirements, check with your accountant.
U.S. Owned Foreign Estates
As with most rules, there are exceptions. If the deceased who left you the inheritance was a United States citizen, or a green card holder permanently living abroad, you must still claim the inheritance on your return. Estate tax on your inheritance may also apply in this situation. Even if the U.S. citizen renounced his citizenship, or the green card holder is no longer considered to be a permanent resident, federal estate taxes apply.
Income From Inheritance
Although your foreign inheritance may not be taxable, any interest or income you make from that money or property is. The IRS requires you to report this income on your tax return for every year the money is generated. Even if you opt not to bring the money into the U.S., but keep it in a foreign bank, you are still liable for the taxes on the income it produces. All foreign accounts must be reported on your annual filings. Failure to do so may result in heavy penalties.
Depending on the circumstances surrounding your inheritance, you may be required to fill out certain forms. There is no law regulating the amount of money you can bring into the country. However, if your inheritance is larger than $10,000, and you decide to carry it across the border, whether in cash or check, or transfer it to a U.S. financial institution, you are required to fill out a U.S. Department of the Treasury form 104 or 105. If your inheritance is deposited into a foreign bank account, the Department of the Treasury form 90-22.1 must also be filed. The IRS also requires you to report an inheritance of more than $100,000 on form 3520, even though it may not be taxable. If your inheritance is in the form of property, such as jewelry or land, the IRS requires that the gift's fair market value be reported on form 706. Fair market value is determined by an appraisal of the property. The amount of the inheritance, after the exclusion is deducted, may be subject to estate tax. The amount of the exclusion varies from year to year.
- IRS: Estate and Gift Taxes
- Parrish Law: Foreign Inheritance & U.S. Tax Laws
- Ryan Velo-Simpson: U.S. Beneficiary of Foreign Estate
- U.S. Department of the Treasury: Report of International Transportation of Currency or Monetary Instruments
- IRS: SOI Tax Stats - Foreign Trusts Metadata
- IRS: Survivors, Executors, and Administrators
- Stockbyte/Stockbyte/Getty Images