The headline

In almost every case where a US person inherits from a non-US-resident foreign decedent, the US person owes no US income tax or US estate tax on the inheritance itself. The foreign country may have applied its own estate or inheritance tax (separate question), but the US tax system treats your inheritance from a foreign decedent as essentially tax-free at the federal level.

What you DO owe is a filing obligation: Form 3520 Part IV, telling the IRS that the inheritance occurred. The information goes on the form because the IRS wants to know about large foreign-sourced wealth transfers, not because the wealth is taxed.

Why no income tax

Inheritances and gifts are excluded from gross income under IRC § 102(a): "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance." This rule applies to gifts and inheritances from anyone, US or foreign.

So the $1 million your foreign uncle left you is not "income" in the US tax sense. It does not appear on your Form 1040. It is not taxed.

Why no US estate tax

US estate tax is imposed on the estate of the decedent, not on the recipient. A foreign decedent's estate is subject to US estate tax only to the extent the estate held US-situs property (US real estate, US securities, etc.) above the nonresident-decedent exemption amount ($60,000 historically). Foreign-situs property — money in a foreign bank account, foreign real estate, foreign securities — is generally not subject to US estate tax even if it passes to a US heir.

So if your foreign grandmother's estate consisted entirely of property in her home country, no US estate tax applies. The estate may pay her home country's tax, but the US gets nothing.

What IS taxed

The income that the inherited assets generate after you receive them is taxable, like any other investment income:

Inherited foreign rental property: rent payments after the date of death are taxable to you.
Inherited foreign brokerage account: dividends and capital gains after the date of death are taxable to you.
Inherited foreign bank deposit: interest after the date of death is taxable to you.

You also get a "stepped-up basis" to the date-of-death value of the inherited assets, so your future capital-gain calculation starts from there, not from what the decedent originally paid.

The filing side

Even though no US tax is owed on the inheritance, the IRS wants to know about it. The reporting form is Form 3520 Part IV, due by April 15 of the year after the inheritance (October 15 with extension).

The Part IV reporting threshold is the same as for gifts: more than $100,000 from a foreign individual or foreign estate, aggregated across related donors in the same year.

Failure to file Form 3520 is penalized at up to 25% of the inheritance amount — even though the inheritance itself is not taxed. The penalty is on the failure to inform the IRS, not on the inheritance.

What about FBAR and Form 8938

If your inherited assets include foreign bank accounts or foreign financial accounts, you may need:

FBAR (FinCEN Form 114) — if your foreign-account balance exceeded $10,000 at any time during the year you took control.
Form 8938 — if your foreign-financial-asset balance exceeded the (much higher) Form 8938 threshold at year-end ($50,000+ depending on filing status).

These are separate filings from Form 3520. You file all three if all three thresholds are crossed. They have different deadlines (FBAR is due April 15 with an automatic October 15 extension; Form 8938 attaches to your Form 1040; Form 3520 mails separately to Ogden).

A worked example

Maria inherits her foreign grandmother's estate in Italy: €800,000 in cash (about $880,000 at receipt-date FX), plus an Italian apartment worth €400,000 (~$440,000). The estate is purely Italian-situs.

Maria's US filings:

Form 1040: no income from the inheritance itself. (Future rental income from the apartment will be reported on Schedule E.)
Form 3520 Part IV: reports the $1,320,000 inheritance.
FBAR: if Maria moves the cash into an Italian bank account in her name and the balance exceeds $10,000, she files FBAR by April 15.
Form 8938: if at year-end Maria's foreign-financial-asset balance exceeds the threshold for her filing status, she attaches Form 8938 to her 1040.

Maria's US tax: $0 on the inheritance itself.

Italy's tax: a separate question handled by an Italian inheritance-tax accountant. Italy's inheritance tax rates are much lower than the US would be — typically 4% on bequests to direct descendants above an exemption — but rules vary by country.

What if you owe foreign tax

If the foreign country's estate or inheritance tax was paid by the estate (before distribution to you), you have no further obligation. The tax was paid out of the gross estate before you received your share.

If the foreign country charges you an inheritance tax on the amount you received, you can claim a foreign tax credit on the US side for income taxes paid abroad, but inheritance/estate taxes paid abroad are not creditable against US income tax (since the US is not taxing the inheritance income). They are creditable against the (often nonexistent) US estate tax via Form 706-CE in rare cases. Talk to a CPA if foreign inheritance tax is in play.

3520file is software, not a CPA firm or law firm. We prepare IRS Form 3520 based on the facts you provide. For advice on your specific situation, talk to a tax attorney or CPA. The above is plain-English explanation, not tax advice.

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