Is a Foreign Inheritance Taxable in the US?

For United States persons, an inheritance is generally not considered taxable income for federal purposes, even when received from foreign sources. The Internal Revenue Service (IRS) typically does not impose income tax on the inherited assets themselves.

Tax Treatment of Foreign Inheritances for US Recipients

The receipt of an inheritance by a U.S. person, regardless of its origin, is generally not subject to federal income tax. The U.S. tax system distinguishes between an inheritance tax, levied on the recipient, and an estate tax, imposed on the deceased person’s estate before assets are distributed. The U.S. federal government imposes an estate tax on large estates, but there is no federal inheritance tax on the recipient.

While some states may impose their own inheritance taxes, these typically apply based on the laws of the state where the deceased resided or owned property. These state taxes generally do not apply to inheritances from foreign sources.

A key aspect of U.S. tax law for inherited assets is the “step-up in basis” rule. This rule adjusts the cost basis of an inherited asset to its fair market value on the date of the previous owner’s death. This adjustment can reduce potential capital gains taxes if the inherited asset is later sold. For instance, if an asset purchased for $100,000 is valued at $500,000 at the time of inheritance, the new tax basis for the heir becomes $500,000, effectively erasing capital gains that accrued during the original owner’s lifetime for tax purposes.

If the heir sells the asset for its fair market value at the time of inheritance, no capital gains tax is due. Any capital gains tax applies only to appreciation in value that occurs after the date of inheritance. This provision is a favorable tax treatment for heirs, though it does not apply to certain assets like inherited IRAs and retirement accounts. While the inheritance itself is not taxed, recipients must fulfill distinct reporting requirements to remain compliant with U.S. tax regulations.

Reporting Requirements for Foreign Inheritances

While a foreign inheritance is not subject to U.S. income tax for the recipient, specific reporting obligations exist. The primary form for reporting large foreign inheritances is IRS Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” This form is informational, not for tax payment.

A U.S. person must file Form 3520 if they receive gifts or bequests from a non-resident alien individual or foreign estate that, in aggregate, exceed $100,000 during a calendar year. For gifts from foreign corporations or partnerships, the reporting threshold is lower, adjusted annually for inflation, and was around $19,570 for the 2024 tax year.

Form 3520 requires detailed information, including the identity of the foreign donor or estate, the date the inheritance was received, and the fair market value of the inherited assets. The form is due on the same date as the recipient’s income tax return, typically April 15, with an extension available until October 15.

Failure to timely file Form 3520 or providing incomplete information can result in penalties. Penalties can amount to 5% of the unreported amount per month, up to a maximum of 25% of the total value of the inheritance.

Tax Implications of Inherited Foreign Assets

While the direct receipt of a foreign inheritance is typically not taxable income, the assets themselves can generate income that becomes subject to U.S. taxation once they are in the U.S. recipient’s possession. Any income produced by these inherited foreign assets, such as interest from foreign bank accounts, dividends from foreign stocks, or rental income from foreign real estate, must be reported on the U.S. tax return.

To prevent double taxation, where income is taxed both by a foreign country and the U.S., U.S. tax law provides mechanisms like the foreign tax credit. If foreign income taxes have been paid on the income generated by these inherited assets, a U.S. taxpayer may be able to claim a foreign tax credit using Form 1116, “Foreign Tax Credit (Individual, Estate, or Trust).” This credit can offset the U.S. tax liability on the foreign-sourced income.

Beyond income tax, holding foreign financial assets, including those acquired through inheritance, triggers additional reporting requirements. U.S. persons must report foreign bank and financial accounts exceeding certain aggregate thresholds on FinCEN Form 114, commonly known as the Foreign Bank Account Report (FBAR). This report is filed electronically with the Financial Crimes Enforcement Network, not the IRS. The FBAR is required if the aggregate value of foreign financial accounts exceeds $10,000 at any point during the calendar year.

Another important reporting requirement is Form 8938, “Statement of Specified Foreign Financial Assets,” mandated by the Foreign Account Tax Compliance Act (FATCA). This form is filed with the IRS and applies to specified foreign financial assets if their value exceeds certain thresholds, which vary based on filing status and whether the taxpayer lives in the U.S. or abroad. Both FBAR and Form 8938 are informational reports aimed at increasing transparency regarding U.S. persons’ foreign financial holdings and are distinct from Form 3520, which specifically reports the receipt of the inheritance.