Do I Have to Pay Tax If I Receive Money From Abroad?

For U.S. citizens and resident aliens, the obligation to the Internal Revenue Service (IRS) extends to worldwide income. However, not all money received from abroad is subject to U.S. tax. The treatment of these funds depends on their classification as either taxable income or a non-taxable transfer, such as a gift or inheritance. Some transfers may also require reporting to the U.S. government even when no tax is owed. Understanding these distinctions is necessary for complying with federal requirements and avoiding potential penalties.

Determining if the Money is Taxable Income

A large portion of money received from abroad is not considered taxable income. The most common examples are gifts and inheritances from foreign persons, as the U.S. does not tax the recipient of a gift or bequest. The responsibility for any gift tax falls on the giver. Since the U.S. government does not have jurisdiction to tax a nonresident alien on the gifts they make, these transfers are free of U.S. tax for the American recipient. This applies to money or property received directly from a nonresident alien individual or a foreign estate.

Conversely, many types of funds received from foreign sources do constitute taxable income. Even if you do not receive standard U.S. reporting documents like a Form W-2 or 1099, the responsibility to report this income remains. Taxable foreign income includes:

• Compensation for services rendered, such as wages or freelance payments from a foreign company.
• Rental income generated from property you own in another country.
• Interest from a foreign bank account.
• Dividends from foreign stocks.

Reporting Foreign Gifts and Inheritances

Even when money received from a foreign source is not taxable, it may still need to be reported to the IRS. Failure to comply with these informational reporting requirements can lead to significant penalties. The disclosure is made using IRS Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, which is separate from your annual income tax return.

You are required to file Form 3520 if you receive foreign gifts or bequests that exceed certain thresholds within a tax year. For gifts from a nonresident alien individual or a foreign estate, the reporting threshold is triggered if the total value of all gifts from that person or estate exceeds $100,000. For purported gifts from foreign corporations or partnerships, the reporting threshold for the 2024 tax year was $19,570. It is important to aggregate all gifts from a single source to determine if you have met the reporting requirement.

To complete Form 3520, you will need to gather specific information, including the full name and address of the foreign donor, the date the gift was received, and a detailed description of the property or cash amount. When reporting gifts over the $100,000 threshold from an individual, you must separately identify each gift valued at more than $5,000.

Reporting Foreign Income and Related Credits

When you determine that money received from abroad is taxable income, it must be reported on your standard U.S. income tax return, Form 1040. This foreign income is combined with your domestic income to calculate your total tax liability. A concern for taxpayers in this situation is the risk of double taxation—being taxed by both the foreign country where the income was earned and by the United States.

To mitigate this issue, the U.S. tax code provides two main mechanisms: the Foreign Tax Credit and the Foreign Earned Income Exclusion. The Foreign Tax Credit, claimed on Form 1116, allows you to reduce your U.S. income tax liability on a dollar-for-dollar basis for income taxes you have already paid to a foreign government. This is often beneficial if you have paid foreign taxes at a rate similar to or higher than your U.S. tax rate. To claim the credit, you will need verifiable proof of the foreign tax paid.

The Foreign Earned Income Exclusion, claimed on Form 2555, allows qualifying taxpayers to exclude a certain amount of their foreign earnings from their U.S. income tax. For the 2024 tax year, the exclusion limit is $126,500. To qualify, you must have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test, which involves being physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.

Disclosing Foreign Financial Accounts

Separate from reporting income or gifts, U.S. law requires the disclosure of foreign financial assets and accounts. These reporting obligations are based on the value of assets held abroad, not on the transactions themselves, and are intended to combat tax evasion. Two reporting requirements exist, each with its own form and filing threshold.

The first requirement is the Report of Foreign Bank and Financial Accounts, commonly known as the FBAR. This report is filed with the Financial Crimes Enforcement Network (FinCEN) using FinCEN Form 114. An FBAR is required if the aggregate value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year. This includes bank accounts, brokerage accounts, and other financial accounts for which you have signature authority.

The second requirement falls under the Foreign Account Tax Compliance Act (FATCA) and is reported to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The filing thresholds for Form 8938 are higher than for the FBAR and vary based on your filing status and whether you reside in the U.S. or abroad. For a single individual living in the U.S., the threshold is met if your specified foreign financial assets are more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year. These assets include financial accounts as well as other holdings like foreign stocks or securities not held in an account.

How to Submit Your Information Returns

The method of submission varies depending on the specific form, and it is important to follow the correct procedure for each return to avoid penalties.

The FBAR (FinCEN Form 114) must be filed electronically through the BSA E-Filing System, which is maintained by the Financial Crimes Enforcement Network. There is no paper filing option for this form. The deadline for the FBAR is the same as the federal income tax deadline, April 15, but an automatic extension to October 15 is available.

Unlike the FBAR, Form 3520 is a paper-filed return that must be mailed to a specific IRS service center address found in the form’s instructions. The due date for Form 3520 is the same as your income tax return, including extensions.

Finally, forms related to your income tax return, such as Form 8938, Form 1116, and Form 2555, are filed as attachments to your annual Form 1040. These forms become part of your overall tax return and are submitted together, whether you file electronically or by mail.