The federal gift tax can apply when U.S. citizens or resident aliens receive certain gifts from other U.S. citizens or resident aliens, but it's payable by the donor, not the recipient of the gifts. The federal government doesn't impose an inheritance tax on its citizens, although it does tax multiple forms of income tax.
Gifts or inheritances received from foreign estates, corporations, or partnerships are subject to some special rules, however.
What Gifts Are Taxable?
No gift tax applies to gifts from foreign nationals if those gifts are not situated in the U.S. In legal terms, the gift isn't "U.S. situs" property.
Otherwise, you must file IRS Form 3520, the Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
Tangible personal property, including real estate, is normally U.S. situs property, whereas many intangible assets, such as stock in foreign corporations, are not.
There's no estate tax, either, provided that the decedent wasn't a U.S. citizen or a foreign national domiciled in the United States and that the property being transferred is situated outside of the United States.
Gifts brought into the U.S. aren't subject to income tax, but they can be subject to the gift tax.
Gift Tax Treaties
The U.S. has entered into treaties with several countries for gift tax purposes, so gifts and inheritances from these jurisdictions would most likely not be reportable or taxable. You must claim the treaty exemption on a gift tax return, however, so you'd still have to file one.
You might find yourself owing federal income taxes on a foreign asset, even if it's not derived from U.S. situs property, because the IRS taxes worldwide income.
The federal government isn't particular about the national source of the funds if you received the money and are able to spend it. But this applies only to assets that produce monetary income, not the value of the asset itself.
The first step in determining whether you must report your foreign gift or bequest to the IRS is, therefore, to determine whether the cash or property received is income or if it can be characterized as a gift.
Income would be reported as income on your personal income tax return. Income represented by a foreign currency should be translated into U.S. dollars at the applicable exchange rate.
Amounts paid for qualified tuition or medical bills on behalf of a U.S. person aren't considered to be either gifts or income.
The Value of the Foreign Gift or Bequest
Two qualifiers determine whether you must file Form 3520:
- The value of the gift or bequest received from a nonresident alien or a foreign estate—which includes gifts or bequests received from foreign persons related to the nonresident alien individual or foreign estate—must exceed $100,000 as of 2020.
- The value of the gifts received from foreign corporations or foreign partnerships must exceed $16,649 as of tax year 2020. This value is adjusted annually for inflation.
When IRS Form 3520 Is Due
Use IRS Form 3520 should generally be filed by the 15th day of the fourth month following the end of the recipient's tax year. This works out to April 15 for most taxpayers—the same time your 1040 return is due.
The IRS extended the deadline for filing individual 2020 income taxes from April 15 to May 17, 2021.
If you request an extension to file your personal income tax return, Form 3520 would be due by the 15th day of the tenth month, or October 15.
Penalties for Not Timely Filing
You can be subject to a penalty equal to 5%, but not to exceed 25%, of the amount of the foreign gift or bequest if you're required to file Form 3520 but fail to do so.
You also might be subject to a penalty if you file the form, but it's incomplete or inaccurate.
The IRS does make exceptions if you have reasonable cause.
More Information About IRS Form 3520
Form 3520 is an informational return, similar to a W-2 or 1099 form, rather than an actual tax return, because foreign gifts themselves are not subject to income tax unless they produce income.
You would therefore file it separately from your Form 1040 tax return.
The gift and inheritance tax laws of the country where the foreign person or entity making the gift or bequest resides aren't a U.S. citizen's concern. The foreign person or entity must consult with tax experts in their own country to address gift and inheritance laws on their end.
A U.S. citizen can receive unlimited gifts and inheritances from a spouse who is not a U.S. citizen. Such gifts are tax exempt.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to them. For current tax or legal advice, please consult with an accountant or an attorney.