Reporting Foreign Inheritance, Distributions & Gifts On US Tax Returns -- Frequently Asked Questions

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David M. Kaufmann, CPA

Voice: 720.493.4804

Email: contact2@kaufmann-cpa.com

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2831 Wyecliff Way
Highlands Ranch, CO 80126

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PO Box 632285
Highlands Ranch, CO 801
63-2285

Note: This is a complicated subject. We will only touch on some topics. We recommend that you talk these issues over with a CPA.  We serve clients in Colorado and the Denver Metro area.

What US tax forms do I need to file if I receive an inheritance or a gift from someone who lives outside the US?
What do I need to do if I receive gifts from a foreign corporation or a foreign partnership?
What do I need to do if I have a foreign bank account or an account with a foreign financial institution?
Are the foreign gifts or inheritances taxable?
What are the penalties for not reporting the gifts or inheritance?

(Note: This discussion will only deal with foreign gifts and inheritances.  Click on this link for a discussion of federal taxes after someone has died. Click on this link for issues pertaining to Colorado inheritance.)
 

What US tax forms do I need to file if I receive an inheritance or a gift from someone who lives outside the US?

If you receive a gift or inheritance from a foreign person (nonresident alien) or from a foreign estate and the total amount during the year exceeds $100,000, you are required to report the gift on Form 3520.

Qualified tuition payments and medical payments for a US person may be excluded from the computation of the $100,000 limit.

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What do I need to do if I receive gifts from a foreign corporation or a foreign partnership?

If you receive more than $14,375 (2011) in gifts from a foreign corporation, a foreign partnership or a person related to a foreign corporation or partnership, you need to report those gifts on Form 3520.

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What do I need to do if I have a foreign bank account or an account with a foreign financial institution?

If you have or control over $10,000 in foreign bank or financial accounts, you should file Report of Foreign Bank And Financial Accounts (Form TD F 90-22.1) "FBAR".  Failing to file this report could result in penalties of the GREATER of $100,000 or 50% of the account balance.

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Are the foreign gifts or inheritances taxable?

Generally, receipt of gifts is not taxable.

The corpus value of an inheritance is not taxable.  There is a possibility that 100% of the inheritance is corpus. If you receive a foreign inheritance payment that includes some portion of income, that income generally would be taxable in the US. If you received $101,000 ($100,000 from corpus and $1,000 from interest) from your French uncle's estate, $1,000 would be taxable in the US.  An exception would be if there was some treaty that would exclude that income.

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What are the penalties for not reporting the gifts or inheritance?

The penalty is 5% per month, not to exceed 25% total. If you can show that there was a good reason that you did not report the gifts, you may be able to avoid the penalty.

Also see the information about reporting foreign accounts.

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US Estate Income Tax Return
US Estate Income Tax Return Instructions
Colorado Estate Income Tax Return

IRS Publication 559

The information contained here are simplifications of complex subjects.  Talk to your CPA and attorney if you want to pursue this subject more.

If you have questions about this, do not hesitate to contact us at 720-493-4804.  We primarily serve Colorado and the Denver Metro area (we have prepared trust & estate income tax returns outside of Colorado too).  A large portion of my business is preparing tax returns and tax planning for trusts, estates and beneficiaries of trusts and estates.

We can answer other questions, like:

How much, if any, tax does one have to pay when they receive an inheritance?

What costs can a trustee or personal representative deduct?