International Inheritance Tax and American Expats

By ZM Ishmurzina

Americans living abroad are puzzled by many legal and financial questions when they receive an overseas inheritance. US taxes for American expats are getting more and more complicated. The international inheritance tax adds the additional layer of complexity to US expat tax returns.

This is one of the latest emails from our clients, American expats living abroad. “My father recently passed away in Germany. He is not a US citizen or green card holder. The overseas estate of my father includes a house, foreign bank accounts, foreign mutual funds etc. I wonder whether I am subject to any international inheritance tax. How will this inheritance affect my US expat tax returns? Should I file the FBAR, PFICs or any other forms to report my father’s accounts?”

US Expatriate Tax Reporting Requirements and International Inheritance Tax

1. Overseas country requirements.

American expats must remember that they might be subject to international inheritance tax in their country of residence. The purpose of this article is to understand US expat tax reporting requirements.

2. US federal tax on inheritances.

The estate of the deceased person might be subject to US federal estate tax. Any tax due will be paid from the estate assets. However, there is no federal estate tax on people who received an inheritance per the IRS.

3. US state tax on inheritances.

American expats are required to check the state filing requirements because some states assess an inheritance tax.

4. Inheritance over $100,000.

Although, the inheritance is not subject to international inheritance tax or US federal tax in the USA, there are some additional reporting requirements in regards to these overseas assets. Specifically, American expatriates living overseas are required to file form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. We earlier discussed the US expat tax filing requirements in regards to this form. American expats must remember that this is only an informational form and there is no US expatriate tax due. However, a failure to file form 3520 can result in penalties in the amount of $10,000. This form must be filed with US expatriate tax returns.

5. Inheritance of foreign financial accounts.

American expats have to report inherited foreign financial accounts on form FBARs, TD F90-22.1. The FBAR form is for informational purposes only too. There is no US expatriate tax or international inheritance tax on foreign financial accounts. The failure to file the FBAR and report foreign financial accounts can result not only in civil penalties but also in criminal prosecution.

6. Income from the inherited property.

Although, American expatriates are not subject to US expat taxes on inherited property and foreign financial accounts, they still have to report their worldwide income including overseas income from inherited accounts. For example, overseas interest income must be reported on US expat tax returns.

7. Distributions from foreign trusts.

American expats who receive overseas distributions from foreign trusts must report this income on US expatriate tax returns. Additional foreign trust forms must be filed too.

8. Foreign real property.

To determine the fair market value of foreign real property, American expatriates must use an exchange rate on the an average exchange rate to report their overseas interest income in US dollars. In case of overseas property, American expats must use the fair market value of the property and exchange rate on the date of donor’s death. The fair market value can be used for depreciation purposes or in case of property sale.

Conclusion

American expats must review US expat tax reporting requirements if they receive an overseas inheritance or to determine whether they owe any international inheritance tax in the resident country. American expats must realize that the penalties for a failure to file many informational forms like form 3520, FBAR, FATCA can be significant. American expatriates are advised to contact an expat tax CPA that provided international tax services for expats. For more information, please contact international tax preparers at Artio Partners.