There is no U.S. federal tax on inheritances. There is a U.S. federal estate tax, but that tax applies on the estate and not on the persons who inherit property from the estate. The estate tax applies on estates that have a total value over a certain amount, and the estate tax would generally be paid from the estate assets before they are distributed to the heirs.
Some states in the U.S. have an inheritance tax, so you would have to check the state tax requirements to see if you owe taxes on the inheritance. And when you receive an inheritance from outside the U.S., there may be certain federal reporting requirements, depending on the type and amount of the inheritance you receive.
If you receive an inheritance of more than $100,000 from outside the U.S. you have to report it to the IRS on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This is an informational form and does not affect your taxes. You should file this form with the income tax return you file for the year in which you receive the inheritance.
If you are a U.S. citizen or resident and you inherit a foreign bank account, or you set up a foreign account with the money or property you inherit, you may have to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts with the U.S. Department of the Treasury. You have to file this form if the total value of all foreign accounts you have exceeds $10,000 at any time during the year. This form must be filed with the U.S. Department of the Treasury, not the IRS, by June 30 following the calendar year you are reporting.
If the total value of all the foreign accounts you have is more than $10,000, you would also have to complete Part III of Schedule B of Form 1040 when you file your annual U.S. federal income tax return.
If you are a U.S. citizen or resident, you are subject to U.S. income tax on your worldwide income. So any income you earn on the property you receive as an inheritance, or the gain on the sale of the property, whether in the U.S. or in another country, would be subject to U.S. income tax.
As indicated by Karen J. Folb of Vacovec, Mayotte & Singer, LLP on the FindLaw website, to determine the income you would have to report on your earnings from the property you inherit in another country, or to calculate the gain or loss on the sale of the property, you would have to convert the amount in foreign currency to U.S. dollars.
The basis of property you inherit is the fair market value on the donor’s date of death. So you would take the fair market value in foreign currency on that date and convert it to U.S. dollars using the exchange rate in effect on that date. This would be the amount you would use for calculating depreciation on income producing real or other property, or for calculating the gain or loss on an eventual sale of the property. The proceeds from the sale would be converted using the exchange rate on the date of the sale.
For periodic income you receive, for example interest on a bank deposit you inherit in another country, you can use the average exchange rate for the year. For non-periodic income, you would use the spot exchange rate in effect on the date you receive the income.
If you receive an inheritance that is placed in a foreign trust that makes distributions to you, you may be subject to U.S. income tax on the distributions. The tax rules in this case can be complex, and you may want to consult with a tax professional to determine your tax liability and reporting requirements. The foreign trust may also have U.S. reporting requirements.
Sources:
Foreign Inheritance & U.S. Tax Laws: Do You Have to Pay? Parrish Law
Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, IRS
Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, U.S. Department of the Treasury
George Sanz, Inheritance from a non-U.S. citizen, Bankrate
Instructions for Form 3520, IRS
Karen J. Folb, U.S. Tax Rules Can Apply to Inheritances and Gifts from Abroad, FindLaw
Schedule B, Interest and Ordinary Dividends, IRS