When it comes to inheritances and gifts, many of us historically thought they were reserved for the extremely wealthy. However, the release of "The Millionaire Next Door" reshaped our understanding of wealth and who possesses it. Today, we increasingly see grandparents lending financial support to their grandchildren. Though we’re more familiar with the process in the U.S., where annual gift exclusions stand at $18,000 per recipient for 2024, the lifetime exclusion is currently so high that most people will never encounter gift or estate taxes.
Note: As of 2024, unless legislation changes, the lifetime estate and gift tax exclusion is set at a substantial USD 13.61 million.
For U.S. citizens, any gifts that surpass the annual exclusion must be reported using Form 709. But what if you are set to receive an inheritance from abroad? Perhaps you live in the U.S. with family overseas, or you’re an American citizen living outside the country. Navigating the tax implications for these inheritances can be intricate. Here’s what you need to know about reporting these assets on your U.S. tax return and whether they will be taxed.
I explored this topic back in 2013, and with a surge of recent inquiries, it’s a perfect moment for a refresher. So let’s break down your questions!
Receiving Gifts or Inheritances from Non-U.S. Persons or Foreign Estates
If you anticipate receiving an inheritance exceeding USD 100,000 from a non-resident individual or foreign estate, the good news is it’s non-taxable. However, you will have reporting obligations.
Reporting Gifts or Inheritances from Foreign Corporations or Partnerships
In terms of gifts or inheritances from foreign corporations or partnerships, the reporting threshold is comparatively lower, set at $18,567 for 2023.
Which Form to Use?
For both scenarios, if the aggregate amount of gifts or inheritances exceeds USD 100,000 or $18,567 respectively, they must be reported using Form 3520. This form needs to be filed with the IRS by the same deadline as your tax return, including any extensions.
What Constitutes Gifts or Inheritances?
Gifts or inheritances can take numerous forms including cash, jewelry, art, investments in real property, or financial instruments. Notably, payments made directly to institutions for tuition or medical expenses are not classified as gifts.
Preferred Transfer Methods
If the transfer involves cash or financial instruments, it’s advisable to route the funds through the recipient’s foreign bank account before bringing them into the U.S., adhering to the foreign country’s transfer guidelines.
Gifts from Covered Expatriates
Introduced by the HEART Act of 2008, sections §877A and §2801 bring in additional rules for gifts from "Covered Expatriates." Gifts or inheritances from these individuals incur a 40% tax on the recipient, with some exceptions.
For any of these scenarios, it’s prudent to consult with an Enrolled Agent, tax attorney, or CPA experienced in cross-border tax issues to ensure compliance and optimal handling of your financial affairs.
