Foreign Inheritance Tax Rules for US Residents

Does the US Tax Inherited Money from Abroad?

Generally, no. The United States does not impose federal income tax on the receipt of an inheritance, whether it comes from a US estate or a foreign one. This is true regardless of the amount. The inherited principal is not income under US tax law.

However, reporting obligations can still apply, and income generated by the inherited assets is taxable. Understanding the distinction is essential.

Form 3520: The Reporting Requirement for Foreign Inheritances

Even though you do not owe income tax on the inherited amount, you may be required to file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) if:

• You received more than $100,000 from a foreign estate or a nonresident alien during the tax year
• You received gifts from foreign persons that, in aggregate, exceed $100,000

This is a reporting form only - not a tax return. Filing Form 3520 does not create a tax liability. Failing to file, however, can result in significant penalties.

Form 3520 is due on the same date as your Form 1040, including extensions (October 15 if you file for an extension).

What Counts Toward the $100,000 Threshold?

For the $100,000 threshold, you must aggregate all amounts received from all foreign persons treated as a single source. Separate gifts from different foreign individuals are counted separately, but if multiple family members are clearly acting in coordination, the IRS may aggregate them.

The form requires you to report:

• The amount received
• The identity of the foreign estate or person (if known)
• The relationship to the decedent

Income from Inherited Foreign Assets Is Taxable

While the inherited principal is not taxed, any income it generates after you receive it is fully taxable:

• Rental income from an inherited property abroad must be reported on Schedule E
• Dividends and interest from inherited foreign accounts must be reported on Schedule B
• Capital gains when you sell the inherited property or assets are taxable (your basis is the fair market value at the date of the decedent's death)

If the property was in a country that taxes the sale, you may be able to claim the Foreign Tax Credit on Form 1116 to offset the US tax on the gain.

Foreign Estate Taxes Paid Abroad

Some countries impose an estate or inheritance tax on assets located in their territory, even when the heir is a foreign resident. This foreign estate tax is generally not deductible on your US income tax return, but may be deductible on a separately filed US estate tax return if a US estate tax return is required.

For most US residents receiving small-to-medium inheritances, no US estate tax return is required (the federal estate tax only applies to estates above approximately $13 million in 2024).

FBAR and FATCA After Inheriting Foreign Accounts

If you inherit foreign bank accounts or financial accounts, you become the account holder and take on all the reporting obligations:

• FBAR: File if the aggregate balance of your foreign accounts exceeds $10,000 at any point during the year
• Form 8938: File if specified foreign financial assets exceed $50,000 at year-end (single filers)

You should coordinate the transfer of account ownership with the foreign bank promptly, as some foreign institutions have different requirements for reporting inherited accounts.

State Tax Considerations

A few US states impose their own inheritance or estate taxes that may interact with foreign inheritances differently from federal law. States like Maryland, New Jersey (historically), and others have had lower exemption thresholds than the federal government. Check the rules in your state of residence.

Penalties for Failing to File Form 3520

The penalty for failing to file Form 3520 on time is 5% of the gross value of the reportable amount per month, up to a maximum of 25%. The minimum penalty for a late filing is $10,000.

The IRS has increased enforcement of Form 3520 in recent years. If you received a foreign inheritance and did not file, consider consulting a tax professional about your options, which may include the IRS's Delinquent International Information Return Submission Procedures.

Start Your Free Tax Diagnostic

Foreign inheritance situations vary significantly based on the country, the asset type, and how the estate was structured. Start the free 5-minute diagnostic to understand your specific reporting and tax obligations.