Ep 25: Like Manna From The Heavens! What To Do If You Receive a Gift or Inheritance From a Foreign Person?
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If you receive a gift or inheritance from a non-US person, you have specific reporting and tax obligations before enjoying your gift.
In this solo episode, Manasa details the thresholds, reporting forms, and tax implications based on the type of gift or inheritance.
Different thresholds apply depending on the type of gift or inheritance, such as $100,000 for gifts from non-US citizens and no threshold for gifts from foreign trusts.
She discusses some forms, like Form 3520, that may need to be filed to report foreign gifts or inheritances.
She also points out possible tax consequences that may arise if the gift is from a covered expatriate—it’s not business as usual.
One thing she points out is to watch out for possible tax obligations in the country where the event occurs – that needs a tax professional (in that country) to figure out.
Tax treaties may help avoid some possible double taxation.
Resources
Ep 22: What Is English For "Covered Expatriate"
Ep 13: Between A Rock And A Hard Place: A Guide To Mitigating Double Taxation
The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Speaker 1 (00:06):
Welcome to the International Money Cafe Podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host, Jen Hams, certified financial planner, founder and owner of Elgon Financial Advisors,
Receiving Inheritances and Gifts from Non-U.S. Persons
Speaker 2 (00:21):
And I'm your host, man Nadi, enrolled agent, owner and founder of Amman Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance, and financial planning. Let's get to the show. Hi. Welcome to a solo episode Today. This solo episode is going to be about receiving inheritances or gifts from non-US persons. So today's episode, basically we are going to be talking about what your reporting obligations and possible tax obligations are of receiving inheritances and all gifts from non-US persons. What we have observed is increasingly there are more and more possibly Gen Xers and millennials who have aging parents abroad and or family abroad from whom they have been receiving gifts and may possibly also receive inheritances. And the main question then comes up as, will we be subject to taxes on these inheritances in the United States as well?
Ramifications of Gifts from Abroad
Speaker 2 (01:45):
So let's go down and look at what possible obligations and ramifications there will be when this happens. Going back to the US context, so if you received an inheritance from another US citizen or a gift from another US citizen, then you know that there is an annual gift tax exclusion, which in 2024 is $18,000. If you receive that, then basically it is the giftor or the donor's obligation to file taxes and claim any annual exclusions or lifetime exclusions. The lifetime exclusion at this time is $13.61 million, and that is the same even on estate. So most Americans do not pay a estate or gift taxes, but what happens to this when the gift or the inheritance is in a cross-border context? So if your gift or your inheritance was coming to you as from a non-US citizen who was outside the us, then you have to look at what the amount of this inheritance is at this time.
If Gifts were More than $100,000…
Speaker 2 (03:10):
The trigger for this is a hundred thousand dollars. So basically if in total your inheritances or gifts were more than a hundred thousand dollars from a non-resident, individual or a foreign estate, then you may have a reporting obligation, but there are no taxes due on this inheritance. If this foreign inheritance or gift was from a foreign corporation or a foreign partnership, then under section 6 0 3 9 F, the amount of the trigger would be 19,570. For 2024, again, you would have a reporting obligation, but no tax obligation. If this gift, however, was from a foreign trust, then there is no threshold, which means that any amount of gifts that you receive from a foreign trust would be reportable. How would you report it? Well, we would go to form 3 5, 2 0 or the 35 20, which is the receipt of certain gifts, large gifts of bequests from certain foreign persons.
How do You File Your Gifts on Taxes?
Speaker 2 (04:35):
How would you file this? This would need to be paper filed. So you complete all the information on this form, and then you have to mail this to a different address to the IRS. The due date for these forms are the same as your 10 40. So if you were in the US then it's April 15th. If you lived abroad, it would be June 15th, and if you had an extension on your 10 40, then it would be October 15th. And so the form 35 20 needs to be postmarked before any one of these dates that would apply to you and mailed to the IRS. You can aggregate these amounts. So when we are looking at the a hundred thousand dollars, then if this a hundred thousand dollars all came to you from related parties, then you can aggregate those amounts to see if they go over the a hundred thousand dollars and therefore trigger your reporting obligation.
Speaker 2 (05:43):
So what are consistent in these gift and or rather what a part of the gift and inheritance? It can be cash, it can be bank deposits, jewelry, other collectibles, investments, mutual funds, fixed deposits, ETFs, stocks and shares. All of those are gifts and inheritances. If you were lucky enough where your tuition was paid or there were medical expenses you had, which were paid to you by a non-US citizen, then those could be also part of this. However, if the tuition or the medical expenses were paid by the non-US citizen directly to the institution, then they do not come under this threshold. We'll be back after this important
Speaker 1 (06:42):
Message. When we started the show, our goal was just to answer the questions that our community have. But Manasa, have you looked at the stats lately?
Speaker 2 (06:52):
Oh, absolutely, Jane. We have people listening to us from over 20 countries and that is super cool. So exciting. Thank you, dear listener. And if you want to be notified of our episodes as soon as they drop, please subscribe on the I am cafe.com. Thank you so much again. And now back to our regular episode. You should also be aware that you may have estate taxes or gift tax obligation in the country where this event occurred. And if you were subject to that, then it is important to know that there are some countries with which the US has a estate and gift tax treaties and you could look at being able to claim credits, et cetera. Now this, all of this that we talked about was if the people from whom you received this were non-US citizens and they had nothing, they had no green cards or no citizenship issues or nothing to do with the us.
Gifts from Expatriates
Speaker 2 (08:05):
However, if you have received an inheritance or a gift or you are going to receive an inheritance or a gift from a person who could be a covered expatriate, and if you go to our episode on covered expatriates, you will learn more about what these covered expatriates are. But for now, if you did receive an inheritance or a gift from a covered expatriate, then know that as a receiver of this gift or inheritance from a covered expatriate, you would be responsible for paying tax up to 40%. This was introduced under section 8 77 A and Section 28 0 1 of the Heart Act in 2008. There is an exception to this, and the exception is if these gifts were already taxed on the covered expatriates timely filed gift or estate tax return, then your obligation to pay this 40% tax is now already taken care of. But always be aware that there is this rule and to know if the person from whom you receive this in inheritance or gift would be a covered expatriate.
Speaker 2 (09:34):
You may have to look into whether at any time they had lived in the US or had a citizenship or a green card and had either relinquished that green card or citizenship and what their estate value at that time would've been. So that would be an important fact to remember. Now, let's say you have received this gift and you have for some reason or the other, decided that at this time this gift needs to stay in the other country. Or it might be that it is not very easy for you to repatriate this at. Maybe it is a real estate that you need to wait to sell or these maybe investments that you need to wait to liquidate. So all of these investments or cash, et cetera, are still sitting in the foreign country. Then what happens? So now you have to look at your thresholds.
FBAR or FATCA Reporting
Speaker 2 (10:45):
So you may have fbar or FATCA reporting. The fbar threshold start at $10,000 and the FATCA reporting, depending on your filing status, single is 50,000 and jointly is a hundred thousand if you live in the us and it's higher if you live abroad, but these thresholds may now be applicable to you. So if these funds all of the financial accounts are still in the foreign country, then you may be subject to FAR and FATCA reporting. The growth in these funds, interest dividends, capital gains, et cetera, will be now subject to US taxation because you have to include that on your US tax return. If you have inherited a rental property, then the rental income has to now be declared on your tax return, and this is when it's important to work with a professional who is good at doing all these reporting because there are other FATCA and other aspects to this as well because you now may be subject to PFIs because depending on how these investments are, if they are in foreign mutual funds, then you may be subject to the PFIC regime.
Speaker 2 (12:10):
It may also trigger certain other foreign information returns. If your gifts and inheritances consisted of maybe holdings in foreign partnerships in foreign corporations. So now you may have to file 54 70 ones or 88 50 eights, et cetera. Or if you have received foreign retirement funds, then you may have to file forms 35, 20 depending on which country these retirement accounts are in, and if you have to start taking distributions from these inherited retirement accounts, then those distributions may also be subject to US taxes. You may also have an obligation to file taxes in that country where this income is coming from or where you got the estate or the gift, and if that is so then you have to make sure that you are doing that timely, and if the US has a tax treaty with that country, then you might be able to avoid some double taxation and be able to claim foreign tax credits.
Assets in the U.S. but Owned by a Non-U.S. Citizen
Speaker 2 (13:28):
Now, what if some of these assets were in the us even though it was owned by a non-US citizen, there may be obligations for you to pay gift taxes because now these tangible assets such as jewelry or art or other tangible assets which are now in the US when you receive them, so those could be triggering certain cash layouts that you may have to take care of. But what if these funds are still sitting in the foreign country? Then there are also things that you have to think about as far as management of these funds. How are you going to be managing these funds from the us? Is it possible to manage these funds in the us? You may have to make a trip to the other country and set up online access to these accounts. You may also have to work with local accountants or attorneys to find out how quickly you can repatriate these funds to the us If that's your plan.
Speaker 2 (14:45):
There might be certain reporting obligations again, or tax obligations in that country you need to be aware of. So these are certain broad rules and regulations for instances where you may have received inheritances or gifts as a US person from a non-US person. There are many other things that go into this, of course, which we really cannot dig into on a podcast, but please know that you have these obligations and reach out to a tax professional and a financial advisor who will be able to walk you through all of these steps and make sure that your tax obligations and reporting obligations are met on time. Again, thank you so much for listening and I'm so glad that I have been able to bring you this episode today. If you want to listen to more of our episodes, they're on our website, the I am cafe.com. Once you go there, you will also have a chance to subscribe to our podcasts. Thank you for listening. Take care.
Speaker 3 (16:04):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross order finances and tax needs.