Foreign Inheritance Definition | International Tax Lawyer & Attorney

Foreign inheritance definition is a topic of crucial importance for both US income and US estate tax compliance, because domestic inheritance and foreign inheritance have vastly different income tax results and reporting requirements. Hence, the topic of foreign inheritance definition directly concerns millions of Americans who reside overseas and tens of millions of Americans who have relatives outside of the United States. In this article, I will explore the foreign inheritance definition and warn against the common tax traps associated with it.

Foreign Inheritance Definition: Confusion Among Taxpayers

There is an enormous confusion right now among many US taxpayers with respect to US tax compliance requirements concerning a foreign inheritance. Some taxpayers firmly believe that a foreign inheritance is never subject to US taxation, some adopt an exactly opposite position while the rest simply do not know what to think.

It appears that the notion that foreign inheritance is non-taxable was acquired by reading various articles on the internet that state exactly this point. The people who believe that foreign inheritance is taxable also draw their conclusion from the internet – the difference arises from the fact that they read different articles. Finally, the third category of taxpayers read both kinds of articles and they simply do not know who to believe.

What is going on? Why is it that the articles on the internet seem to draw mutually-exclusive conclusions? Is one category of articles correct while the other one is one hundred percent wrong?

The answer to these questions lies in identifying the purpose for which an internet article was written, because the source of confusion lies in the foreign inheritance definition. It turns out that there are two definitions with separate applicable US tax compliance requirements!

Foreign Inheritance Definition for Income Tax Purposes

The first foreign inheritance definition exists for income tax purposes only. Under this rule, foreign inheritance is an inheritance received from a decedent who is a non-resident alien.

In this context, “non-resident alien” is defined by the IRS income tax rules. In other words, a non-resident alien is a person who does not fall into any of the tax residency categories. He cannot be a US citizen or US permanent resident; he did not stay long enough to satisfy the Substantial Presence Test; and he never declared himself a US tax resident (for example, by filing a joint US tax return with his US spouse).

Foreign Inheritance Definition for Estate Tax Purposes

A different definition of foreign inheritance applies under the US estate tax rules. Here, a foreign inheritance is defined as an inheritance received from a decedent who is a nonresident noncitizen. A noncitizen is a nonresident if he is domiciled outside of the United States. The term “domicile” here means acquiring a place to live without a present intention of later leaving. There are various factors used to determine a person’s domicile.

It is important to understand that, due to these two different definitions of a foreign inheritance, it is possible that a person could be a tax resident for income tax purposes and a nonresident noncitizen for estate tax purposes. Vice-versa may also be true.

Foreign Inheritance Definition and Tax Consequences

Now that we understand that there is a separate foreign inheritance definition for each tax regime (income and estate), we can clarify the confusion that prevails on the internet and among US taxpayers.

Generally, if the decedent was a non-resident alien, then neither his estate nor his US heirs would be subject to income taxes at the time of inheritance. I wish to emphasize here that this rule applies only “at the time of inheritance”, not before or after the foreign inheritance takes place. Exceptions may be possible with respect to foreign trusts.

On the other hand, if an inheritance was received from a taxpayer who is domiciled in the United States, then it will be subject to US estate tax rules irrespective of the country where the inherited assets are located. Of course, estate tax treaties may provide a certain amount of relief against double-taxation in this case.

If an inheritance was received from a nonresident noncitizen, then all foreign assets, except those considered as “US situs assets”, will avoid US estate taxation. The US situs assets above the exclusion of $60,000, however, may still be taxed in the United States.

Contact Sherayzen Law Office for Professional Tax Help With Your Foreign Inheritance

All of the rules that I have stated here are general, and your international tax attorney needs to apply them to your specific fact pattern in order to determine whether an inheritance fits a foreign inheritance definition for either estate or income tax purposes or both.

Furthermore, one should remember that “non-taxable” does not mean “non-reportable”. There are various income tax information reporting requirements that may apply to you even if your foreign inheritance was not taxable. Additionally, income tax recognition may be required in certain situations with respect to your foreign inheritance, especially before and after the you are deemed to have inherited your foreign assets.

Under these circumstances, the help of Sherayzen Law Office is of critical importance if you wish to stay in US tax compliance and avoid high IRS tax penalties. We are an international tax law firm highly experienced in US tax compliance concerning a foreign inheritance. We have successfully helped US taxpayers all over the globe with their foreign inheritance issues, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation About Your Foreign Inheritance!

Reporting Foreign Gifts and Inheritance to the IRS: Form 3520

While gifts and bequests from nonresident aliens are usually not taxable, they must be reported to the IRS if they are above a certain threshold.  Generally, U.S. persons who receive the aggregate amount of $100,000 or more in gifts and/or bequests from nonresident aliens or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) during a tax year must report those amounts on Form 3520.  The same reporting requirement applies to U.S. persons who receive a gift of more than $14,165 from foreign corporations (or foreign persons related to such foreign corporations or foreign partnerships).

Failure to file Form 3520 (and even late filing of the form) may result in substantial penalties, unless the taxpayer may demonstrate that failure to comply was due to a reasonable cause and not willful neglect.

It should be noted that U.S. person must also use Form 3520 to report distributions from a foreign trust during the relevant tax year.  Remember, while gifts and bequests are not taxable, the distributions from a foreign trust are generally taxed as income by the U.S. government.

Furthermore, one should remember that receiving a foreign inheritance or a gift may trigger other U.S. tax reporting requirements.  The most prominent of these requirements is the Report on Foreign Bank and Financial Accounts (FBAR). Generally, FBAR is required to be filed by any U.S. person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.

For example, if a taxpayer receives an inheritance of $120,000 in 2011 which is then deposited into the taxpayer’s checking account in India, this taxpayer must file both forms 3520 and FBAR.  The likely due date for Form 3520 would be April 15, 2012 whereas the FBAR must be received by the Department of Treasury by June 30, 2012. (Note: Form 3520 and FBAR are both now due in April as of 2017.)

Finally, a note of caution: requirements under Form 3520 may become complex fairly fast.  For example, the exact date of inheritance or gift may be in dispute.  Also, it is possible that some gifts should be reported in a certain way only.  Even the calculation of $100,000 per year may be subject to various interpretations.  Therefore, a help of an international tax attorney should be secured by the taxpayer in order to determine what international tax reporting requirements apply.

Contact Sherayzen Law Office for International Tax Help

If you believe that you may be subject to Form 3520 reporting requirement, contact Sherayzen Law Office now to resolve this situation.  Our experienced international tax firm will guide you through the complex international tax reporting requirements, including voluntary disclosure issues.

Remember, it does not matter whether you are located in another state or outside of the United States – we can help!