Foreign wire transfers are a fast and secure way to send or receive money from another country. If you receive a foreign wire transfer, you may be wondering, "Do I have to pay taxes on wire transfers?" If the wire transfer was sent as a form of income, you must report the income on your taxes. If you receive a foreign wire transfer as a gift, you won't have to pay tax on it but you may need to report it to the IRS.
Foreign Wire Transfers
Foreign wire transfers are a way to electronically send money abroad. Consumers often use wire transfers for large payments when foreign exchange rates are favorable and the sender knows the foreign exchange rate equivalent before he makes the transfer.
Wire transfers are faster and more secure compared to other methods such as bank drafts or sending a physical check. The sender can also avoid foreign transaction fees if he wires the cash in the recipient's currency.
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Taxable Foreign Income
U.S. citizens and residents are taxed on income from all sources, not just income earned domestically. That means if someone wires you money from a foreign country as a form of income, you must report it on your tax return. Foreign wages, nonemployee compensation, interest and dividends are taxed at the same tax rate as their domestic counterparts.
However, the country in which you earned the money may also tax the earnings. To compensate for this, the IRS does allow U.S. citizens to claim a foreign tax credit for any taxes paid on earnings to other foreign taxing authorities.
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Foreign Bank Accounts
In an effort to deter citizens from hiding income abroad, the IRS imposes certain reporting regulations for foreign financial accounts. The Bank Secrecy Act requires citizens to report foreign financial accounts if the aggregate value of the accounts ever exceeds $10,000 during the year. You're not necessarily taxed on the financial account balances; the IRS just wants a record of which citizens are holding large amounts of assets abroad.
Financial accounts you must report include brokerage accounts, bank accounts, unit trusts and mutual funds. If you meet the criteria, you should complete a Report of Foreign Bank and Financial Accounts (FBAR) and file it through the IRS's electronic filing system.
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Reporting Foreign Gifts
In the eyes of the IRS, gifts are not income and are not taxable to the recipient. However, the IRS does require taxpayers to report especially large gifts that they've received from abroad. A taxpayer must file Form 3520 if she receives more than $100,000 in gifts from nonresident aliens, foreign persons and foreign estates, or if she receives more than $16,815 in gifts from foreign corporations or foreign partnerships.
This means if you receive $20,000 from each of your six uncles in France, you must file Form 3520. For the purposes of filing this form, cash is valued at the rate received and assets are valued at their fair market value on the date they're received.