Navigating Form 3520: US Tax Implications and Reporting Requirements for Inheriting from Abroad

Navigating Form 3520: US Tax Implications and Reporting Requirements for Inheriting from Abroad

As a US citizen who received €185,000 inheritance from a deceased parent in the Netherlands, what are the US tax implications and requirements related to Form 3520, and what are the potential pitfalls to be aware of?

Let’s break down the essentials so that you’re well-informed.

  • Basics of Form 3520
    Form 3520 is a requirement by the IRS to report certain foreign transactions, and receiving an inheritance from a foreign source is one of those. When you inherit funds from a deceased person overseas, like your parent in the Netherlands, you must report this inheritance on Form 3520.
    Example: Let’s say Jane inherited €185,000 from her mother in Amsterdam in July. By the subsequent tax filing deadline, Jane must report this inheritance on Form 3520.
  • Foreign Estate as a Specified Foreign Financial Asset on Form 8938
    In addition to Form 3520, the IRS requires some taxpayers to report their foreign financial assets on Form 8938. A foreign estate, from which you’ve inherited money, is considered one of these specified foreign financial assets.
    Example: Apart from the cash John received from a property sale in the Netherlands, he should also be attentive to any ownership in the foreign estate or any other financial assets he might have overseas, as they need to be declared on Form 8938.
  • Conversion Rates Matter
    When reporting foreign currency amounts on US tax forms, it’s crucial to use the appropriate exchange rate. For Form 3520, use the Treasury Department’s yearly average rate for conversions, unless the inheritance was directly received on a specific date, in which case, the exchange rate for that date should be used.
    Example: If Emma received her inheritance on multiple days, she would use the yearly average rate. However, if she received it all on August 12th, she would use the exchange rate for August 12th.

Key Takeaways:

  • If you inherit money from abroad, report it on Form 3520 – provided the reporting threshold is met.
  • Foreign estates might also necessitate reporting on Form 8938.
  • Always use the correct conversion rates when converting foreign currencies for US tax forms.

Further Assistance

Tax laws, especially those dealing with foreign transactions, can be technical. While we’ve aimed to make this explanation clear, there might be unique aspects of your situation that need further attention. For an in-depth guide and personalized advice, click on this link to consult directly with a Certified Public Accountant.

***Disclaimer: This communication is not intended as tax advice, and no tax accountant -client relationship results**

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