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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Manasa Nadig, EA (00:01.166)
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're going to be talking about what your reporting obligations and possible tax obligations are of receiving inheritances and or 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? 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. So 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 estates. So most Americans do not pay 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
Manasa Nadig, EA (02:22.17)
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, the trigger for this is $100 ,000. So basically, if in total your inheritances or gifts was more than $100 ,000,
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 6039F, the amount of the trigger would
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 3520.
or the 3520, which is the receipt of certain gifts, large gifts or requests from certain foreign persons. 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...
Manasa Nadig, EA (04:21.978)
forms are the same as your 1040. 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 1040 then it would be October 15th, and so the form 3520 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 $100 ,000, then if this $100 ,000 all came to you from related parties, then you can aggregate those amounts to see if they go over the $100 ,000 and therefore trigger your reporting obligation.
So what are consisted in these gift and or rather what are 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 -U .S. citizen, then those could be also part of this. However, if the tuition or the medical expenses were paid by the non -U .S. citizen directly to the institution, then they do not come under this threshold.
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 estate and gift tax treaties. And you could look at being able to claim credits, et cetera.
Manasa Nadig, EA (06:46.338)
Now, all of this that we talked about was if the people from whom you received this were non -U .S. citizens and they had nothing, they had no green cards or no citizenship issues or nothing to do with the U .S. However, if you have received an inheritance or a gift or you're 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 covered
of as a receiver of this gift of inheritance from a covered expatriate, you would be responsible for paying tax up to 40%. This was introduced under section 877A and section 2801 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' 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
inheritance or gift would be a covered expatriate, you may have to look into whether at any time they had lived in the U .S. 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 have been. So that would be an important fact to remember.
Manasa Nadig, EA (09:09.24)
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, you know, maybe it is a real estate that you need to wait to sell.
or these may be 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. So you may have F -bar or FATCA reporting. The F -bar thresholds start at $10 ,000.
And the FATCA reporting, depending on your filing status, single is 50 ,000 and jointly is 100 ,000 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 FBAR 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 PFICs because depending on how these investments are, if they are in foreign mutual funds, then you may be subject to the PFIC regime. It may also trigger certain other foreign information returns.
Manasa Nadig, EA (11:33.498)
if your gifts and inheritances consisted of maybe holdings and foreign partnerships and foreign corporations. So now you may have to file 5471s or 8858s, et cetera. Or if you have received foreign retirement funds, then you may have to file forms 3520, 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're 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.
Now, what if some of these assets were in the US, even though it was owned by a non -US citizen, then 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
Manasa Nadig, EA (13:20.184)
the US, then you receive them. So those could be triggering certain cash layouts that you may have to take care
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
work with local accountants or attorneys to find out how quickly you can repatriate these funds to the US if that's your plan. There might be certain reporting obligations again or tax obligations in that country which you need to be aware of. So these are certain broad rules and regulations
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.
Manasa Nadig, EA (15:11.01)
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 are on our website the imcafe .com once you go there you will also have a chance to subscribe to our podcasts. Thank you for listening take care.