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How does inheritance tax work?

Inheritance tax, often referred to as estate tax in the US, can be a complex matter, especially for US citizens inheriting assets from non-US persons. Inheritance for US citizens is treated similarly to receiving a gift. The same rules apply, but the key difference lies in the valuation of the inherited assets.

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Estates of decedents who die during 2024 have a basic exclusion amount of $13,610,000, increased from $12,920,000 for estates of decedents who died in 2023.

Here’s a particular scenario where a US citizen inherits from a non-US person, such as a parent.

  • Valuation of Inherited Assets: For assets like property, the IRS considers the fair market value at the date of the deceased’s death, not the original purchase price. This means if a US citizen inherits a property bought by their non-US parent decades ago, the value assessed for tax purposes is its worth at the time of the parent’s passing.
  • Taxable vs. Reportable: Generally, the inheritance itself is not taxable. It’s reportable on the US tax return, similar to how large gifts are reported. However, if the inherited property generates income (like rental income), that income is subject to US tax.

Will the inheritance be reported on US tax returns?

Yes, the inherited value must be reported on the gift tax return. This includes cash and property values. Also, if the inherited property, such as real estate, generates income, this income must be declared on the US tax return and will be taxed accordingly.

What are the important points I need to know about if I’m inheriting property?

  • Understand the Fair Market Value (FMV): US citizens should be aware that the IRS looks at the current market value of inherited property, not its historical purchase price.
  • Reporting Requirements: While the inheritance itself might not be taxable, it’s crucial to report it correctly to the IRS, especially if it includes income-generating assets.
  • Seek Professional Advice: Given the complexities of inheritance tax laws, especially involving assets in foreign countries, US citizens should seek professional tax advice to ensure compliance and understand their tax obligations fully.

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.


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