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Do I pay tax on international money transfers?
Not all money transfers are taxed, but you should be aware of the circumstances where you may need to pay tax and report your money transfer to remain in compliance with the law. It will often depend on the following factors:
The amount of money transferred
Some countries will have a threshold for how much you can send or receive without having to pay any tax. If you’re sending an amount that exceeds this limit, you’ll usually have to pay a certain percentage of the amount over that limit as tax.
The source of the funds
If you’re receiving money from abroad through inheritance, sale of property, or employment income to name a few, these are likely to have tax implications. If the money is a gift - so there is no expected exchange of goods or services in return - then you may have a tax-free allowance.
Your residency status
Whether you are a permanent resident or not can also affect how much tax you pay, as some taxes may not apply to non-residents.
The tax laws of both countries
Different countries have a number of laws regarding tax implications, such as regulations on what sum needs to be reported to the relevant tax authorities and regulatory bodies to ensure the funds were acquired legally.
Are money transfers reported to the IRS?
Any financial transaction worth over $10,000 must be reported to the IRS, with information about the person initiating the transaction, the person receiving the money, and the nature of the transaction. This is known as a Currency Transaction Report (CTR), and the reason for this is to combat financial crime and money laundering.
When do I pay tax on money transfers abroad?
Money transfers abroad might be subject to tax in any of the following circumstances:
💰💰 Do I pay tax when sending large amounts of money abroad?
US citizens have a tax-exempt allowance on gifts to people overseas, and in 2023, this stands at $17,000 ($34,000 for married couples). If the transferred sum exceeds the threshold, then the tax is applied to the whole sum, not just the amount exceeding the limit.
The responsibility to pay the tax here lies with the sender to pay the tax, not the recipient.
Over the course of a lifetime, every person can gift up to $12.92 million without incurring any taxes. This figure includes gifts of inheritance money you plan on leaving in the future, even if the money is stored overseas and transferred back to the US. There are two options available when filing gift returns - you can either choose to pay the gift tax, or bypass the payment and add the gift to your lifetime exemption limit.
How much money can you send overseas without paying tax?
The maximum amount you can send overseas without paying tax is $17,000, or $34,000 for married couples filing their taxes jointly.
What is the maximum amount of money I can receive without paying tax?
For those receiving financial gifts through an international money transfer, you won’t pay taxes, but you may be required to report the gift to the IRS.
What forms do I have to fill in for large money transfers?
If the gift you receive exceeds $100,000, you will need to fill out an IRS Form 3520. Gifts from a business or a partnership that exceed $17,339 also require that you file Form 3520. You are not required to pay taxes on this amount; however, if you fail to file this information, you could incur a fine of up to $10,000.
💰👼 Do I pay tax on inheritance received from abroad?
You won’t need to pay any tax to the IRS on a foreign inheritance that is held outside of the USA from someone who isn’t an American resident or citizen.
Depending on the country from which the assets are coming, you may have to pay a foreign inheritance tax - this will depend on your specific circumstances.
Do I have to pay taxes on inherited properties in the US owned by a foreigner?
If any of the assets being passed on are based in the USA, even if the holder was based outside of the country, then it’s likely you will need to pay tax. For example, if a non-US citizen owned a home in the USA and passed it onto a US citizen, the home would be seen as US-situs, or ‘in America’ - it would then be subject to tax.
What forms do I have to fill in for money transfers related to inheritance?
While you don’t need to pay any US tax on foreign inheritance you receive, you’ll need to report it if the value of the estate exceeds $100,000, using forms 3520 and any others that may be necessary. Failure to fill out this form could lead to a 35% fine on your inheritance.
💰🧓 Do I pay tax on foreign pensions or retirement accounts?
Unfortunately, if you’re earning a foreign pension it is likely you’ll be subject to taxation in the US. Your contributions to a foreign pension won’t reduce your taxable income, and your employer’s contributions to the foreign pension will increase your taxable income.
The US has tax treaties with many nations around the world, which prevents double taxation on income. But if you’re earning a foreign pension in a country without a treaty, you may be at risk of paying double tax. This is because in the US, pension funds are taxed both when accrued and when paid out, as well as potentially in the country the pension is being paid.
Pensions are considered unearned income, so you cannot use the Foreign Earned Income Exclusion to offset any taxation.
What forms do I have to fill in for foreign pensions?
As well as the standard form 3520 for amounts over $100,000, you may also need to fill in the following forms depending on your situation:
Form 8621: If PFIC rules are applicable to your pension
Form 8938: Required on all foreign financial assets if you meet the threshold
FinCEN Form 113: If you’re required to report foreign bank and financial accounts and meet the threshold
💰🏠 Do I pay tax on overseas property income?
If you sell a property overseas, any money you make counts as capital gains that go towards your worldwide income - which you’ll be taxed on as a US citizen.
Do I pay tax on income from primary residential properties overseas?
If you’re selling a primary overseas residential property, you’ll pay the same taxes and get the same benefits as if you were selling your main home in the US. This means you’ll pay tax on any excess of sales over $500,000 for joint tax returns and $250,000 for any other filing status. The rate you’ll be taxed at is the lower long-term capital gains rate.
It will qualify as your main residence if you live in and own the property for at least 24 of the last 60 months up to the date you sell the property.
If the property is inherited and you sell it, the above applies. However, you will likely be taxed on any amount gained over the property’s fair market value when the original owner passed or the property was deeded to you.
Do I pay tax on foreign rental properties?
If you’re selling a foreign rental property, you may be taxed at a different rate depending on how much you gain, how long you hold the property, and how much its value may have depreciated.
What forms do I have to fill in for property transactions?
You may need to file Form 8949, just as with the sale of a property in the US, as well as a Schedule D form, and potentially a Form 4797 for rental properties. If the income from the sale of an overseas property is paid into a foreign bank account, this may need to be reported using FinCEN Form 114 and FATCA Form 8938.
📈🌐 Do I pay tax on foreign investments and capital gains?
As stated above, you’ll be required to pay tax on capital gains you make on foreign investments. This means, in a broader sense, any income you make from your investment is subject to taxes in the US - this includes interest payments and dividend payments. You may also be liable to pay tax to the country where the investment has been made - again, opening you up to the risk of double taxation.
However, you can use US foreign tax credits to offset some or all of what you owe to the US government.
What forms do I have to fill in for foreign investments and capital gains?
To find out how much you can claim as a foreign tax credit, you’ll need to fill out IRS Form 1116, as well as Form 1040-X.
Case study
Example One
If the amount you paid in tax to a foreign government is more than what you owe to the IRS, the most you’ll be able to claim is the entirety of the US tax due. So, imagine you have a foreign investment in Denmark and you paid the Danish government $500 in taxes, but you owe $400 to the IRS as tax on the same amount.
You could claim $400 as a tax credit, but the remaining $100 can be carried over one year or up to ten years - so long as you complete Form 1116 and an amended tax return.
Example Two
However, if you owe more to the IRS than you paid to the foreign government, you can claim the whole amount as a tax credit. So if you paid the Danish government $500 in taxes but you owe the IRS $600, you can offset the full $500 you already paid as tax in Denmark - so you’d only owe the IRS $100 as a result of claiming this credit.
💼🌐 Do I pay tax on overseas income from a job?
If you’ve earned income from abroad, you’ll be required to pay tax on it to the IRS. This is because the USA is one of two countries in the world that tax their citizens on worldwide income.
What tax relief is there for overseas income?
The Foreign Tax Credit outlined above is one way to claim relief if the country you are earning money in has a treaty with the US.
An alternative way to claim for tax relief is to claim for the Foreign Earned Income Exclusion. This is more commonly used by expats who earn income overseas - but to qualify, you must spend a minimum number of days outside the US each year, and you must be able to demonstrate ties to the country you earn income from.
It’s important to note that while Foreign Tax Credits can also cover you for investments, the Foreign Earned Income Exclusion doesn’t apply to interest or dividend payments.
For the 2022 tax year and 2023 calendar year, you can earn up to $112,000 of foreign income and exclude it from tax liability. This may be even more if you’ve paid for housing - and if you’re married, you may each be able to claim for the full exclusion so long as you are both working.
What forms do I have to fill in for foreign employment income?
You’ll need to file Form 2555 alongside your US tax return to claim the exclusion - even if all your income may be exempt from tax, if you don’t fill the form in you will still have to pay.
💰🎁 Do I pay tax on gifts?
Foreign gifts you receive are not taxable, but you will have to report a foreign gift(s) or bequest(s) you receive if the value exceeds $100,000 during the taxable year. If this is the case, you’ll need to identify each gift valued at over $5,000 separately.
Foreign gifts you give are taxable - the threshold for 2023 is $17,000 per gift per person, or $34,000 for married couples. The responsibility to pay tax due on these gifts is with the sender, not the recipient.
What forms do I have to fill in for gifted money transfers?
You’ll need to fill in Form 3520 to declare the value of the gifts to the IRS.
🧳🏠 Do I pay tax if I’m an expat?
If you’re a US citizen living and earning income abroad, you’ll unfortunately still have to pay tax on your worldwide income. This is true even if you’ve never actually been to the US - if you were born on an American military base or have an American parent you may still owe tax on your income.
If you’re working abroad, you might need to also pay US social security and Medicare taxes, especially if you’re self-employed or you work for a company based on US soil. Expat employees pay a rate of 7.65% in the 2022 tax year, but self-employed workers pay at 15.3%.
Aside from your employment income, you may also be required to pay tax on passive income such as interest payments investments, retirement plans, foreign rental properties, and social security payments in some situations.
If you have any foreign account holdings over $10,000 in total, you’ll also need to report these via a FBAR or Foreign Bank Account Report with a FinCen 114 form.
What forms do I have to fill in as an expat?
If you earned over $12,950 in 2022, or over $25,900 as a married couple filing jointly, you’ll need to file an IRS Form 1040 tax return. If you’re self-employed and you earned over $400 dollars you’ll also need to file a tax return, and if you’re a US person married to a non-US person or vice versa the minimum amount you have to earn before filing Form 1040 is $5.
How to simplify international taxes when sending money
We understand that customers may want to avoid confusion with regard to paying taxes for transfers. In this section, we provide a few tips you could follow to ensure that you pay the correct taxes on time.
Make sure that you organize the transaction details for future retrieval. For example, when you go to pay the taxes at the end of the year, the transaction details should be easy to access and organized. Most reputable money transfer services provide a good user interface for accessing transaction details. For instance, Wise provides a transaction history that can be exported to your local storage.
You can also hire a tax accountant that understands international laws and how they relate to money transfers. You would simply need to send the accountant your transaction details and they will file the taxes on your behalf.
How do I reduce my tax bill when sending money abroad?
To keep your tax bill as low as possible, ensure you’ve accurately declared all money being transferred, even if you don’t expect to pay tax on the amount. Make sure you’ve filled out every form you need to correctly, and don’t miss any deadlines.
Working with an accountant is one of the best ways to send money ensuring you are always in keeping with your country’s tax regulations, but will also give you more clarity on which foreign transfers should be exempt from tax.
Depending on where you reside, you will likely have to fill out certain forms for your foreign money transfer to be certified as exempt from any tax, so having a professional to help you with these steps is important. In addition to this, it is important to file taxes on time as late payments can result in a hefty fine.
How do I pay tax to foreign governments?
If you pay tax to a foreign government, the best way to ensure the money gets where it needs to go in good time and at low cost is to use a money transfer provider. These companies specialize in moving money abroad, offering better rates than competitors like banks and digital wallets.
Compare deals with MoneyTransfers.com to find the best rate for your transfer - it takes minutes to find the perfect provider, sign up and send money abroad.
Paying tax on money transfers to different countries
Tax laws in the USA can be tricky at times, but depending on where you’re sending money you may also have another set of rules and regulations to be aware of.
Do I pay tax on money transfers to Mexico?
If you’re sending money to Mexico, there are no specific tax laws to be aware of. If the money is part of an inheritance or estate, or is a gift, then the recipient may not owe any taxes to the Mexican government. Gifts to children, spouses and parents are automatically exempt from taxes.
If you’re sending money for business reasons, you’ll owe tax on amounts sent over $10,000 - which will involve filling out an IRS Form 8300.
Do I pay tax on money transfers to Canada?
Money transfers to Canada won’t be subject to any taxes, unless it comes from the sale of a property, company shares, stocks, or other securities - in which case there may be a capital gains tax.
However the transfer will still need to be filed, otherwise the recipient in Canada may be charged with tax evasion.
Do I pay tax on money transfers to India?
There are no taxes charged to the sender or receiver for gifts to close relatives from the USA to India. However, other transfers will be subject to gift tax in the USA, and any amount over $700 dollars will be subject to income tax for the recipient in India.
