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My wife is to receive a lump sum of money from a foreign…

My wife is to...

My wife is to receive a lump sum of money from a foreign government that is owed to her deceased father. She will also receive his pension. In that country, she would not pay income taxes on this money. Does she pay income taxes here in the usa?

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

Father was a foreign national, she is a us legal resident. He died 30 years ago.

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1/29/2018
Tax.appeal.168
Tax.appeal.168, Tax Accountant
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Hello. Thank you for choosing this Q&A service for assistance. My name is***** will be assisting you. I take it that your wife is the beneficiary of the funds from the foreign government, so this is an inheritance. Is my thought pattern correct on this. Also what country will she be receiving the pension from?

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Customer reply replied 4 months ago
brazil
Customer reply replied 4 months ago
the pension will be paid monthly for the rest of her life.

In general an inheritance is not taxable on the federal level. As she will be receiving the pension monthly for the rest of her life, I need to check on that matter. Regarding the lump sum, will that amount be $100,000 or more? If so, your wife will be required to complete Form 3520, which is an information return only. No tax is required to be paid. SEE BELOW:

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Reporting Requirements
You must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if, during the current tax year, you treat the receipt of money or other property above certain amounts as a foreign gift or bequest. Include on Form 3520:

  • Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate);

or

  • Gifts valued at more than $15,601 for 2015 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).

You must aggregate gifts received from related parties. For example, if you receive $60,000 from nonresident alien A and $50,000 from nonresident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000. Report them in Part IV of Form 3520. Treat gifts from foreign trusts as trust distributions you report in Part III of Form 3520.

File Form 3520 separately from your income tax return. The due date for filing Form 3520 is the same as the due date for filing your annual income tax return, including extensions. You file an annual Form 3520 for all reportable foreign gifts and bequests you receive during the taxable year.

REFERENCE SOURCE:

https://www.irs.gov/businesses/gifts-from-foreign-person

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What type of account is the lump sum of funds coming from? Your wife may also be required to file a FinCen 114 Foreign Bank and Financial Accounts Report (FBAR). I will get back to you on the taxation of the ongoing pension and get back to you.

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Customer reply replied 4 months ago
not sure how she will receive the lump sum from the government
but the monthly amount will be directly deposited into her foreign bank account and will be over $10,000 usd a month.

As this is this case, annually she is going to have to complete a Form FinCen114 (FBAR) and complete the Form 3520 annually. SEE BELOW:

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FinCen 114 (FBAR):

Who Must File the FBAR?

A United States person must file an FBAR if that person has a financial interest in or signature authority over any financial account(s) outside of the United States and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year.

Who is a United States Person?

A “United States person” means:  A citizen or resident of the United States;  An entity created or organized in the United States or under the laws of the United States. The term “entity” includes but is not limited to, a corporation, partnership, and limited liability company;

 A trust formed under the laws of the United States; or

 An estate formed under the laws of the United States.

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Financial account includes the following types of accounts:

 Bank accounts such as savings accounts, checking accounts, and time deposits,

 Securities accounts such as brokerage accounts and securities derivatives or other financial instruments accounts,

 Commodity futures or options accounts,

 Insurance policies with a cash value (such as a whole life insurance policy),

 Mutual funds or similar pooled funds (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions),

 Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.

REFERENCE SOURCE:

https://www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf

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Still checking on the possible taxation of the pension payments. I will get back to you shortly.

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Based on the information that I have come across, as the pension payments are an inheritance, these payments will not be included in your wife's income. SEE BELOW:

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An inheritance, except for a deferred plan such as a 401k or IRA, is not taxable and is not reported on your tax return.

Income earned on inherited assets after you receive them is taxable. For example, if she earns interest on the funds in the foreign bank account, she will have to report the interest earned as income. As the funds will be in a foreign bank account, she will need to convert the $$ when reporting interest earned.

-----------------------------------

To determine taxable income for U.S. tax purposes when the income producing asset is denominated in a foreign currency, the income and expenses related to the asset must be translated into U.S. dollars using the appropriate exchange rate. If payments are periodic such as monthly interest, the amount is translated into U.S. dollars using the average exchange rate for the year. Non periodic transactions are translated using the spot rate for the day.

------------------------------------

Based on the information that you provided, your wife will be required to complete the FinCen 114 and the Form 3520 annually. There are penalties if she does not. For more information relating to the FinCen 114, refer to the following link. https://www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf

It also appears that your wife is required to complete the Form 8938 as well. Refer to the following link for more information on the Form 8938.

https://www.irs.gov/pub/irs-pdf/i8938.pdf

-----------------------------------

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If for any reason your wife has to pay taxes to Brazil, she may qualify to claim the Foreign Tax Credit. SEE BELOW:

---------------------------------

Qualifying Foreign Taxes

You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the credit.

Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Deduct foreign taxes on Schedule A (Form 1040), Itemized Deductions

Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

REFERENCE SOURCE:

https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit

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