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July 6, 2015
When a relative living overseas leaves an inheritance, there are a number of things that must be considered including tax implications, the best way to transfer the money, and legal issues. There is a lot of misinformation online about the tax liabilities and the claim process.
For example, many people believe that the inheritance isn’t subject to US tax laws because the relative lived and earned the money abroad, but this isn’t true. It’s not just money that is subject to US taxes, inheriting an overseas property must be reported as well. Unfortunately, as with everything tax related, it’s not so cut and dry. Everything from the gift/inheritance giver to the amount plays a factor in the tax and legal implications.
Luckily, we are here to help clear up a few misconceptions and guide you on the right way to claim your overseas inheritance or gift.
If you are receiving a gift or inheritance from overseas family members over a $100,000 value, then it must be reported to the IRS using the 3250 form. This is only for inheritances of gifts from related parties, such as a mother and father. If you receive $90,000 from your mother and an additional $25,000 from a friend, then it won’t have to be reported. While the value exceeds $100,000, it doesn’t come from related parties and therefore isn’t subject to the same laws.
If you are receiving a gift or inheritance from an overseas family member for the purposes of qualified medical or educational fees, than it isn’t counted against the $100,000 threshold. This loophole only works if the payment is made directly to the relevant healthcare provider or school though.
In addition to the traditional reporting of an overseas inheritance or gift, there is also something called the estate tax for exceptionally large inheritances of over $5.43 million as of 2015. The estate tax is asses on the value of the property and any other assets being transferred at the time of the relative’s death, not the value at the time of purchase. The calculated fair market value of the goods including cash, stocks, bonds, properties, trusts is known as the Gross Estate.
Once the fair market value has been calculated, there are certain deductions that can be included to bring down the value of the Taxable Estate, which is the value that the taxes are paid against. Some common deductions which may be included are mortgages, debts, estate administration and maintenance fees, and charitable donations.
The deductions don’t end there, to further reduce your tax liabilities you can factor in something known as the lifetime taxable gifts. This law says that you are able to receive up to $14,000 a year untaxed as a gift from a living or deceased relative. The IRS expects you to keep a running tally of the untaxed gifts you receive each year. To illustrate an example, if you are 40 years old and receive an inheritance of property and cash worth $5.5 million, you would be able to deduct an additional $560,000 from the Taxable estate bringing you below the $5.43 million threshold and negating your responsibility to pay an estate tax.
To learn more about the legal and tax ramifications of an estate tax, check out the IRS Estate Tax page.
Once you have consulted an accountant to discuss the tax liabilities of your overseas inheritance, it is time to start looking at your options for repatriating the money back into your home country. While your first instinct might be to go to your local bank to handle the transfer, it might not be your best option. After you lose a large chunk of your inheritance to taxes, legal fees and accountant fees, do you really want to lose another 10% to a bank?
Your best bet is to compare some dedicated currency transfer and exchange firms. They are experienced at handling the transfer of large sums of money from one location and currency to another. In addition to their experience, they almost always offer better exchange rates and lower fees than traditional brick and mortar financial institutions. You can use our Comparison Tool to find out which is the best FX firm based on your money’s location and the transfer amount.