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Inheritance Tax and Gift Tax

This chapter talks about how does inheritance tax work and what happens to gift tax when giving and receiving gifts.

How does inheritance tax work?

Inheritance tax, often referred to as estate tax in the U.S., is a tax on the transfer of the estate of a deceased person.


What if I’m a US citizen inheriting from a non-US parent?

When a US citizen inherits assets and wealth from a non-US parent, the inheritance may need to be reported to the IRS. The rules for gifts apply in these cases, and the inheritance is typically reported on Form 3520. Always get specialist international US tax advice before filing Form 3520.v

How should cash and property inheritances be reported?

  • Cash Inheritance: The value of cash inherited is reported in the same way as a gift.
  • Property Inheritance: For inherited property, the reportable value is the fair market value at the date of the parent’s death.

Is inherited property valued at purchase price or current market price?

When dealing with inherited property, its valuation for tax purposes is not based on the purchase price but rather on the current market value at the time of the original owner’s death. This concept is known as the “stepped-up basis.”.

For example, if a property was originally purchased for $450,000 and is valued at $825,000 at the time of the owner’s death, the new basis for the heir would be the latter amount, $825,000. This stepped-up basis can significantly reduce the capital gains tax liability if the property is sold later by the heir, as the taxable gain would be calculated based on the difference between the sale price and the stepped-up basis, rather than the original purchase price.

The complexities of tax implications associated with inherited property can be a complicated task. However, a seasoned tax professional can provide clear explanations and calculations regarding the stepped-up basis of your inherited property. They can determine the fair market value at the time of the original owner’s death, ensuring that you have an accurate basis for any future capital gains tax calculations.

Are inheritances taxable in the US?

Inheritances are generally not taxable. However, if the inherited property generates income, that income could be taxable on the individual’s US tax return.

What happens if the inherited property generates income?

If the inherited property generates income, such as rental income, this income is taxable and must be reported on the individual’s US tax return. The inheritance itself, however, is typically not taxable.

Why partner with a specialist Expat accountant?

Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.

Do I need to report gifts to the IRS on my US tax return?

When giving gifts, U.S. persons must report gifts over a certain threshold to the IRS, but these are not taxed unless they exceed the lifetime exclusion amount. When receiving gifts, if the amount exceeds $100,000 from a non-resident alien, it must be reported to the IRS, but it is generally not taxed unless the gift generates income.

What happens when you give a gift to a non-US person?

  • Responsibility to Report: As a U.S. person, you are responsible for reporting gifts given to non-resident aliens.
  • Reporting on a Special Form: The amount gifted is reported on a specific form, which also tracks the lifetime exclusion amount (approximately $11 million, subject to annual changes).

Is there a tax on gifts given?

  • No Tax on Gift Amount: Giving a gift doesn’t mean you’ll pay taxes on it.
  • Reporting Threshold: The exclusion amount is $17,000 for 2023. Gifts above this amount require reporting; those below do not.

What types of gifts need to be reported?

All Gifts Count; whether it’s cash, a car, or other valuables, the total value of gifts is considered for reporting.

What happens when I receive a gift from a non-resident alien?

  • Reporting Threshold: Gifts over $100,000 must be reported.
  • Reporting Details: The form requires details like the amount received and the date of receipt.
  • Tax Implications: Generally, there are no taxes unless the gift generates income (e.g., rental income from real estate).

Does the type of gift matter?

  • Cash and Assets: Both cash and assets, like real estate, are included in the reporting.
  • Impact on Other Forms: Receiving a large cash gift may affect the reporting on FBAR and possibly Form 8938, depending on the situation.

What if it isn’t a gift, but a loan?

Money lent with the intention of repayment is not considered a gift.

However, if the loan generates interest, that interest is taxable and must be reported on your U.S. tax return.

Understanding the nuances of gift taxes is crucial for U.S. citizens and green card holders, particularly those living abroad. Whether giving or receiving gifts, a tax professional can help you become aware of the reporting requirements and tax implications. Remember, it’s not just about the value of the gift but also how it impacts your overall tax situation.

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