Rules for Reporting Foreign Gifts and Inheritances

When and how to report foreign inheritance

Which gifts are taxable?

There is no gift tax applicable to gifts from foreign persons if those gifts are not located in the United States. Legally, a gift is not “U.S. situated” property. Otherwise, you must file IRS Form 3520, the annual return to report transactions with foreign trusts and to receive certain foreign gifts.

Gift tax treaties

The United States has entered into treaties with several countries for gift tax purposes, so gifts and inheritances from those jurisdictions may not be reportable or taxable. However, you must claim the treaty exemption on your gift tax return; you will still need to file a gift tax return.

Income taxes

You may find yourself liable for federal income taxes on foreign assets, even if not derived from “U.S. situated” property, because the IRS taxes worldwide income. The federal government does not care about the national source of funds if you have received money and can spend it. But this only applies to assets that generate cash income.

Value of foreign gift or inheritance

There are two thresholds that determine whether you are required to file Form 3520: the value of the gift or inheritance received from foreign non-residents or foreign estates—which includes gifts or inheritances received from foreign persons related to non-resident foreign individuals or foreign estates—must exceed $100,000 in 2021. The value of gifts received from foreign corporations or foreign partnerships must exceed $16,815 in 2021. This amount is adjusted annually for inflation.

When to file IRS Form 3520

Generally, IRS Form 3520 must be filed by the 15th day of the fourth month after the end of the tax year of the recipient. This means April 15 for most taxpayers—the same time you file your 1040 return.

Penalties for late filing

You could be subject to a penalty of 5%, but not more than 25%, of the value of the foreign gift or inheritance if you were required to file Form 3520 and did not. You may also be subject to a penalty if you filed the form but it is incomplete or inaccurate.

More information on IRS Form 3520

Form 3520 is an informational return, similar to a W-2 or 1099, rather than an actual tax return, because foreign gifts themselves are not subject to income tax unless they generate income. Therefore, you must file it separately from your income tax return 1040.

Some distinctions

Gift and inheritance tax laws in the country where the foreign person or entity giving the gift or inheritance is located are of no concern to the U.S. citizen. The foreign person or entity should consult tax experts in their country to deal with gift and inheritance tax laws in their country. An American citizen can receive unlimited gifts and inheritances from a spouse who is not a U.S. citizen. These gifts are tax-exempt.

Source: https://www.thebalancemoney.com/report-gifts-and-inheritances-3505655