What do you need to know about U.S. taxes if you receive an inheritance?

You have inherited money, a home or investments while living outside the United States. Do you need to tell the IRS? Will you have to pay U.S. tax? And does it matter that the person who died was not American?

Receiving an inheritance is generally not treated as income for U.S. federal income tax. But you may still need to report it. Reporting means giving the U.S. authorities information, usually on a form. It does not automatically mean paying tax.

There can also be U.S. tax questions later. For example, inherited savings may earn interest, or you may rent out or sell an inherited home.

This guide explains the main questions for Americans living abroad. It also applies to dual citizens and people who only recently discovered that they are American, often called Accidental Americans. Local inheritance rules need a separate check.

Will I pay U.S. tax on the inheritance?

In general, the money or property you inherit is not included in your income for U.S. federal income tax. The IRS guidance for people receiving an inheritance explains this distinction.

Income from what you inherited is a different matter. Interest on savings, payments from shares and rent from a home can be taxable. Selling an inherited asset can also create a taxable profit.

Some payments received after a death have special rules. For example, payments from certain inherited retirement accounts can be taxable. Calling a payment an inheritance does not always make it tax-free.

It helps to keep three questions separate:

• Is the inheritance itself taxable?
• Do I need to report receiving it or owning the assets?
• Will income or a later sale need to go on my U.S. tax return?

You may also hear about estate tax. This concerns the transfer of assets when someone dies. It is generally a question for the deceased person’s estate, rather than ordinary income tax on your inheritance. An estate is the money, property and debts a person leaves behind.

Why does it matter who I inherited from?

The U.S. rules can differ depending on whether the inheritance comes from a U.S. estate or a foreign estate. A foreign estate is one treated as non-U.S. under the relevant U.S. rules. The person’s address alone does not settle this.

Someone who was not a U.S. person

An inheritance from a non-American parent can raise a reporting question. The IRS uses the term nonresident alien for certain people who are neither U.S. citizens nor U.S. residents for tax purposes. This is a tax term, not simply a description of where someone lived.

Large gifts or inheritances from such a person, or from a foreign estate, may need to be reported on Form 3520. This can include a home or investments, not just money.

A U.S. person or U.S. estate

Living abroad does not, by itself, make an inheritance from a U.S. estate a foreign inheritance. Different questions may arise, such as whether a payment includes income earned by the estate or money from a retirement account.

If you receive a bank account or investments outside the United States, those assets may still need a separate reporting check.

Your own U.S. status matters too. U.S. citizenship can bring tax and reporting obligations even if you have never lived in America. Our guide to U.S. tax liability explains the background.

What is Form 3520?

Form 3520 is an IRS form used to report certain large gifts and inheritances from outside the United States. It is also used for certain dealings with foreign trusts, which have separate rules.

For gifts or inheritances from a nonresident alien individual or foreign estate, the reporting limit is more than $100,000 received during the tax year. The IRS explains the foreign-gift and inheritance rules.

Gifts and inheritances from the same source may need to be added together. Amounts from related sources can also need to be combined. Receiving the money in several payments does not necessarily keep you below the limit.

What matters is what you received, not necessarily the value of the whole estate. A review may need the value of your share of the money, property and investments, expressed in U.S. dollars.

Depending on the amount, source and arrangement, Form 3520 may be required. Reporting the inheritance on this form does not automatically mean you owe U.S. income tax.

The $100,000 limit applies to this particular reporting rule. Other forms have their own limits. Different rules also apply to payments described as gifts from foreign companies or partnerships, and to money received through a foreign trust.

What if the money goes into a bank account abroad?

An inheritance can increase your bank balance enough to bring account-reporting rules into play. This can happen even when the inheritance itself is not taxable income.

FBAR: a report about accounts outside the United States

FBAR stands for Foreign Bank Account Report. It tells the U.S. authorities about certain bank and other financial accounts held outside the United States.

Generally, a U.S. person must file this report if they own or have another reportable financial interest in those accounts, or can direct payments from them, and the combined value exceeds $10,000 at any time during the calendar year. Exceptions apply. The IRS explains the FBAR requirements.

The limit is for the accounts combined, not for each account separately. A balance that is temporarily higher after an inheritance can matter. FBAR is filed separately with FinCEN, the U.S. Treasury agency that receives these reports.

Form 8938: a report about certain financial assets abroad

Form 8938 can cover foreign bank accounts and certain other financial assets, such as investments. When required, it is filed with your U.S. income tax return. Its limits are different from FBAR’s.

For individuals who meet the IRS conditions for living abroad, the limits are:

Exceeding either limit can bring Form 8938 into play. These higher overseas limits require a foreign tax home and satisfaction of the IRS rules about residence or time spent abroad. Your tax home is usually the area of your main place of work, which may differ from your home address.

If you do not have to file a U.S. income tax return for that year, you generally do not have to file Form 8938. FBAR may still be required. The IRS comparison of the two reports explains the differences.

Your bank may also send information to the U.S. under FATCA, a law about reporting accounts held by U.S. persons. That does not replace any forms you are required to file yourself.

What if I inherit a home outside the United States?

A home that you own directly is not itself a bank account or a financial asset reported on FBAR or Form 8938. However, receiving it from a foreign estate may still raise a Form 3520 question. A home held through a company or trust needs a different review.

If you later sell the home, you may need to work out whether there is a profit for U.S. tax purposes. This involves its tax basis: the starting amount used to calculate that profit, with any required adjustments.

For many inherited properties, that starting amount is the property’s market value when the person died. Market value means what the property could reasonably have sold for at that time. Exceptions apply. The IRS explains how inherited-property values affect a later sale.

Rent from the home can also need to be included in your U.S. tax return. U.S. calculations generally use dollars, so changes in exchange rates can affect the result.

A local property-tax value is not automatically the right value for U.S. purposes. The correct treatment depends on your situation, including how the property was inherited and whether it is rented out or sold.

What if I inherit investments?

You may inherit shares in individual companies, bonds or investment funds. A fund pools money from investors to buy a collection of investments. An ETF, or exchange-traded fund, is a fund whose units are traded on a stock exchange.

Some non-U.S. funds and ETFs fall under the PFIC rules. PFIC stands for Passive Foreign Investment Company. It is a U.S. tax category for certain foreign companies that mainly receive investment income or hold assets that produce it.

These rules can mean additional reporting on Form 8621 and special U.S. tax treatment of payments or sale profits. The answer depends on the investment and any applicable exceptions. Inheriting a fund rather than buying it does not remove the need to check.

Several questions can apply to the same portfolio: reporting the inheritance, reporting the account that holds it, and checking the investments inside the account. A statement showing only the total balance may not be enough. The names of the funds and the individual holdings are useful too.

What about a company or trust?

Inheriting part of a foreign company

Shares in a family business or holding company can bring extra U.S. reporting questions. A holding company is a company that owns other companies or assets.

Form 5471, used to report certain interests in foreign companies, may be relevant. This depends on how the U.S. treats the company, how much you own and other circumstances. A company holding investments may also need a PFIC check.

Receiving money through a foreign trust

A trust is an arrangement in which someone holds or manages assets for other people under a set of rules. The U.S. has specific rules for trusts it treats as foreign.

A payment from a foreign trust may need to be reported in Part III of Form 3520. A U.S. person treated as an owner of the trust may also have obligations involving Form 3520-A, a separate report about the trust.

The ordinary $100,000 foreign-inheritance limit does not settle the trust-reporting question. A trust payment can also include taxable income. A specialist needs to review the trust documents and the payment details.

If the person who died had given up U.S. status

Some former U.S. citizens and former long-term residents fall into a special category called covered expatriates. Not everyone who gives up U.S. status falls into this category.

A rule called Section 2801 may impose tax on certain gifts or inheritances they leave to U.S. citizens or residents. This is an exception that needs specialist review.

Which questions may apply to my inheritance?

This table does not mean every inheritance requires these forms. It shows which questions may need a closer look.

A simple example in the Netherlands

Imagine a Dutch-American citizen living in the Netherlands. Their non-American parent dies and leaves them savings, a share of a home and investment funds. This is a hypothetical example, not a calculation of anyone’s tax.

The family may be dealing with a Dutch notary and Dutch inheritance tax. Separately, the American beneficiary may need to check Form 3520, the bank accounts holding the money, the inherited funds and the home’s value for a future sale.

Dutch inheritance tax is called erfbelasting. Whether it applies depends on the Dutch rules and the circumstances of the person who died. Paying it does not, by itself, complete any required U.S. reporting.

A Dutch tax or estate specialist can advise on the Dutch side. The Dutch Tax Administration explains cross-border inheritance tax. Our guide to living in the Netherlands as a U.S. person gives broader background.

What information should I gather?

You do not need to know all the U.S. forms before asking for help. Start with the basic facts:

• Who did you inherit from, and what do you know about their U.S. status?
• Did the assets come from an estate, trust or company?
• What did you receive, what was your share, and when did you receive it?
• What was it worth, and are there documents showing the value?
• Which bank accounts received the money?
• Which shares, funds or other investments did you inherit?
• Will a home be rented out or sold, or has that already happened?
• Have you filed U.S. returns before, and did the estate send you any tax forms?

A will, estate statement, property valuation and bank or investment statements can help a specialist understand what happened.

When might the forms be due?

Form 3520 is filed separately from your income tax return. For people using the calendar year as their tax year, the usual deadline is April 15 of the following year. Qualifying overseas filers may have until June 15. This generally requires living and working outside the United States and Puerto Rico on the relevant due date, and including a statement with the form.

A valid extension for the income tax return can generally extend Form 3520 to October 15. FBAR has its own April 15 deadline and an automatic extension to October 15. Form 8938 goes with the income tax return when required. Weekends, holidays or specific relief can affect the dates.

Missing a required information form can lead to penalties even when no income tax is due. If an earlier inheritance was never checked, a specialist can first establish which forms and years may be involved.

Our U.S. tax return service explains how Americans Overseas connects people with specialist help. A useful first question is: does this inheritance change what I need to report?

This guide gives general information. It does not determine which forms you must file or how much tax you owe. Those answers depend on your own circumstances.

Get Informed with Americans Overseas

We, the founders of Americans Overseas, were born in the Netherlands and received our American citizenship through our (American) mother.

When we first learned about the U.S.–Netherlands tax treaty around 2013, we felt disbelief (“this can’t be true”), anger (“how can they do this?”), fear (“will I get fined or have problems?”), and panic (“what should I do?”).

Unfortunately, it is true that there is a U.S. tax obligation for Dutch citizens who acquired American nationality by birth. There was no information from local authorities, the U.S. consulate referred us to the IRS, and the IRS itself was impenetrable.

That is why we started this initiative: to help others with reliable information, to prevent unnecessary panic, and to offer free, no‑obligation assistance. When needed, we can connect you with a network of affordable professionals (accountants) who can help you meet your U.S. tax obligations.

Contact us for more information

Sources

• IRS: Publication 559: Survivors, Executors, and Administrators
• IRS: Gifts from foreign persons, including foreign bequests and covered expatriates
• IRS: Instructions for Form 3520
• IRS: Report of Foreign Bank and Financial Accounts (FBAR)
• IRS: Comparison of Form 8938 and FBAR requirements
• IRS: Instructions for Form 8938
• IRS: Basic questions and answers on Form 8938, including directly held real estate
• IRS: Inherited-property basis and sales
• IRS: Foreign currency and currency exchange rates
• IRS: Instructions for Form 8621
• IRS: Instructions for Form 5471
• IRS: Nonresident aliens
• IRS: What tax home means
• Dutch Tax Administration: Cross-border inheritance tax