When it comes to receiving gifts and inheritances from individuals living abroad, there are specific rules in the tax code that apply. The rules depend on whether you receive the gifts from a U.S. citizen or resident alien or someone who is a citizen of another country. If you receive a gift or inheritance from another U.S. citizen or resident alien living in another country, then U.S. gift tax and inheritance tax laws will apply to your situation.

What Are the Reporting Requirements?

There are a few steps involved in determining whether you need to report your foreign gift or inheritance to the IRS. The first step is to determine whether the cash or property you received can be described as a gift. Any income you receive if it’s from another country should still be reported as income on your personal income tax return. Any money that is paid for tuition or medical expenses should not be considered as gifts or income.

If you have determined that what you’ve received is a gift, then you must proceed to determine its value. You must file an IRS Form 3520 if the value of gifts and bequests you received from a foreign person exceeds $100,000 or if you received gifts from foreign business entities in excess of $15,601.

You must file the IRS Form 3520 to report the gifts or inheritances you received during the course of a tax year at the same time you file your income tax return. Your Form 3520 will be due the same day as your annual income tax return. If you don’t file this form in time, you may be looking at a penalty of between 5 percent and 25 percent of the gift amount you received for each month for which the failure to report continues. You may also be subject to a penalty if you file the Form 3520, but it is inaccurate or incomplete.

It is important to remember that income from property that is located in another country may be subject to foreign income taxes and be taxed here in the United States. If the income is from a nation that has a tax treaty with the U.S., the withholding tax may be diminished or even eliminated.

Don’t Be Caught by Surprise

Whether you are a citizen of the United States, a permanent resident or a foreign national on a work permit or a visa, money that is brought into the country as a gift or bequest may be subject to taxes. An error or oversight could get you into serious trouble. And this problem could be further magnified if you are in the U.S. on a visa. If you plan of receiving a gift or inheritance from abroad or if you already have brought money into the United States, it would be in your best interest to contact an experienced Virginia tax attorney who can help you understand your tax obligations, avoid penalties, and potential options to pay what you owe.