Reporting inheritance as income?

[Music City Mama]

I'm hoping someone can help me with this. My MIL passed away last year. We didn't inherit a lot, but my DH and his siblings inherited the proceeds from the sale of her home, the sale of her car, some life insurance, pension, etc.

I'm assuming none of this is taxable as 1) it's not that much money 2) we haven't received any type of tax form from the estate.

I think that any taxes were taken out prior to DH and his siblings receiving any money, but even if it's not taxable, do I still need to report it as "income" (albeit, not taxable) anywhere on our 1040? Thanks.

 

[Hoodie]

If memory serves me, you lucked out (so to speak) as there was no federal inheritance tax this year due to a loophole that wasn't closed.

Your state may still have one though.

 

[ols386]

After my dad passed away, all of the taxes on his estate and bank/savings account monies were already paid.

 

[MinnieFan4ever]

I would contact a "tax man" on that one. I know you can recieve a gift/inheritance of $13,000 tax free a year.

 

[golfgal]

There has never been an "inheritance" tax. There IS estate tax and income tax. OP, some of this may by taxable as "income" tax and some may not. Life insurance is not unless the life insurance policy was a work policy over $50,000 and some other conditions. Proceeds from the sale of the house depend on if the sale of the house was above and beyond the step up in basis you received for selling the house.

There is no estate tax-oddity in the tax law-for 2010 so the estate may have come off ok but you still might owe tax depending on how much it was and how it was transferred. It would be best to consult a financial planner and/or a CPA since the money came through several channels.

The pension-if it is a straight payout for a survivor benefit most certainly is taxable income to you and you SHOULD be receiving a 1099 for that. It could have been mailed on Monday and just not made it to your mailbox yet.

 

[Hoodie]

There has never been an "inheritance" tax. There IS estate tax and income tax. OP, some of this may by taxable as "income" tax and some may not. Life insurance is not unless the life insurance policy was a work policy over $50,000 and some other conditions. Proceeds from the sale of the house depend on if the sale of the house was above and beyond the step up in basis you received for selling the house.

There is no estate tax-oddity in the tax law-for 2010 so the estate may have come off ok but you still might owe tax depending on how much it was and how it was transferred. It would be best to consult a financial planner and/or a CPA since the money came through several channels.

The pension-if it is a straight payout for a survivor benefit most certainly is taxable income to you and you SHOULD be receiving a 1099 for that. It could have been mailed on Monday and just not made it to your mailbox yet.

This is a good answer. Also to add that even if the taxes came out of the estate, there should be some documentation of it.

 

[JessicaR]

Is Inheritance Taxable?

By T.A. Workman, eHow Contributor .updated: January 19, 2011

Most people have imagined what they would do with a sudden windfall. These musings usually involve paying off debts and make luxurious purchases. Is there a downside to inheriting besides the possible lifestyle changes? The answer depends on how much is inherited, what is inherited and where the person lives. Laws regarding inheritance can sometimes be so complex and may leave an individual wondering if they should accept the bequest at all.

Inheritance

An inheritance is not always a lump sum of unexpected money. Anything of value handed down legally is an inheritance, be it a home, a single piece of furniture or even Uncle Charlie's seat on the board of directors. Inheritance is recognizable as either tangible or intangible. Simply put, tangible property is touchable like a car or a home. Intangible property, while possibly valuable, is something that is not touchable such as a patent or ownership in a corporation.

Estate

An estate is a person's property that is legally transferable. When a person dies, everything they have of value is referred to as their estate. It may consist of tangible and intangible property. When a person arranges the distribution of their estate prior to death, it is referred to as estate planning. Estate planning is usually done with the assistance of a lawyer and may include a will, trust, insurance policy and consideration of tax laws.

Federal Taxation

Why is it important to distinguish between an inheritance and an estate? At the federal level, taxation is on the estate, itself, rather than the inheritance. If a person receives an inheritance, taxes are taken from the estate prior to distribution to heirs. When someone dies, a compilation of their assets is submitted to the IRS, depreciation and debts are considered and a "taxable estate" results. Most estates are not large enough to incur federal taxation based on the current year's IRS guidelines. For example, in 2009, only estates exceeding $3.5 million are subject to federal estate tax.

State Taxation

At the state level, inheritance taxation is much more complicated and differs from state to state. The amount of inheritance tax may depend on factors like federal taxation amount, relationship to the deceased and overall estate value. In 2009, only 11 states still collect inheritance tax. To decipher inheritance tax, the best option is to consult a tax specialist, attorney or, in the least, the state IRS website.

Refusing an Inheritance

Let's face it, an inheritance is not always a windfall and electing to forgo an inheritance is a practical choice in some cases. The official term when refusing an inheritance is called "disclaiming," and it allows the inheritance to pass to the next person in line. To qualify, the disclaimed inheritance must have no strings attached. The decision is irrevocable (not reversible) and has no contingencies (conditions) --- it is as if the person was never an heir. Rules governing inheritance disclaimer are part of I
.

Read more: Is Inheritance Taxable? | eHow.com http://www.ehow.com/about_5184526_inheritance-taxable_.html#ixzz1CqHc7nai

 

[tvguy]

I think the inheritance has to be over $1 million per person to trigger Federal Taxes, state taxes vary from state to state.

The executor of the estate will, however will have to file a "final" tax return for your MIL. Hopefully THAT was done before the estate was distributed.

 

[mickeyboat]

Inheritances and life insurance are not taxable as income on a federal level to the recipient, unless they are from a 401k / IRA type of asset which was taken as a cash payout.

The estate may have had to pay taxes - but it would have been taken care of by the estate, not the beneficiary.

Some states (PA is one) have an inheritance tax to the beneficiary. I strongly recommend you consult a tax professional this year.

 

[dsanner106]

You should be fine as long as the estate was not in the seven figure range, I had this occur 4 years ago and the only nasty surprise was a smallish tax bill a couple year later because while the money sat in the bank awaiting dispersal, the interest it earned was also distributed and that was taxable. I received a "nice" letter from the IRS telling me what I owed.

Drew

 

[Cheshire Figment]

There are three different categories related to an inheritance.

First is property such as cash, stocks and bonds, real estate, and personal property. This is not taxable and does not get reported on your tax return. For any property or stocks, the basis for gain or loss on future sale is the fair market value on the date of death.

Second is income from assets that have been transferred. So once you own the property, and interest, dividends, or other sources of income are taxable to you since you own the property at this time.

Last is pre-tax retirement accounts, such as an IRA or 401(k). These are fully taxable to you unless you are able to have them rolled over into your own IRA or 401(k). But when the money is distributed it is fully taxable.

 

[manning]

If you inherit a house or stock valued at $600,000 and sell it for $700,000 you will pay taxes on $100,000.

Selling price minus new cost basis = taxable amount.

 

[golfgal]

I think the inheritance has to be over $1 million per person to trigger Federal Taxes, state taxes vary from state to state.

The executor of the estate will, however will have to file a "final" tax return for your MIL. Hopefully THAT was done before the estate was distributed.

The 1,000,000 figure is for ESTATE tax, that doesn't mean that there are not INCOME tax consequences.

There are three different categories related to an inheritance.

First is property such as cash, stocks and bonds, real estate, and personal property. This is not taxable and does not get reported on your tax return. For any property or stocks, the basis for gain or loss on future sale is the fair market value on the date of death.

Second is income from assets that have been transferred. So once you own the property, and interest, dividends, or other sources of income are taxable to you since you own the property at this time.

Last is pre-tax retirement accounts, such as an IRA or 401(k). These are fully taxable to you unless you are able to have them rolled over into your own IRA or 401(k). But when the money is distributed it is fully taxable.

I know you are a retired CPA but manning brings up a good point below. Also, depending on how a house was "transferred" you could very well have tax on the house sale. If you were an "owner" of the house before the person died, you may have to assume THEIR cost basis. Hopefully it was set up properly but not always. Same thing with stocks and bonds. They get a step up in basis but if you wait to sell them, you COULD incur taxes. It isn't always cut and dry, thus, consult a financial planner or CPA.

If you inherit a house or stock valued at $600,000 and sell it for $700,000 you will pay taxes on $100,000.

Selling price minus new cost basis = taxable amount.

 

[snapppyd]

I think the only thing you will be taxed on is possibly the pension/IRA/401K. Wheny my FIL passed away we were hit with a very hefty tax bill on his IRA's.

 

[golfgal]

I think the only thing you will be taxed on is possibly the pension/IRA/401K. Wheny my FIL passed away we were hit with a very hefty tax bill on his IRA's.

That is not true. It all comes down to how these items were exchanged/transferred and how the accounts were set up. Even the life insurance could be taxable as income if the account meets certain tests.

 

[mickeyboat]

Based on the information the OP gave us, Cheshire's advice is spot on.

 

[Music City Mama]

Thank you for the feedback, everyone.

When she died, they sold her house immediately (DH's sister is a real estate agent) and so the siblings never became owners. I believe the attorney who handled this (and the sale of the car -- same situation -- all done very quickly), had all applicable taxes taken out prior to monies being distributed.

As far as her retirement -- it was a "teachers' pension" -- she wasn't a teacher, but worked for the school system for many years in an administrative position. I want to say that I recall that whatever my DH signed for that, specifically stated that this was not taxable.

There were only a couple of other things -- her bank account and a small life insurance policy.

I think I will follow up with his sister since she handled so much -- we live in a different state (that has no income taxes, btw) and she probably has already gotten the answers to these questions.

Thanks again for your responses.

 

[Dan Murphy]

I think the only thing you will be taxed on is possibly the pension/IRA/401K. Wheny my FIL passed away we were hit with a very hefty tax bill on his IRA's.

IRA's, generally, if being paid to a non- spousal beneficiary, may be set up as an inherited IRA, if continued tax deferral is a goal or of interest to the beneficiary/ies. As an inherited IRA, income tax can be continued to be deferred, until decedent would have been 70 1/2, then RMD's required. Or continued to be annually distributed if decedent had been over 70 1/2 and already had been taking RMD's. The timing and rules of distribution flow from the decedent's rules.

http://www.irs.gov/publications/p590/ch01.html#en_US_2010_publink1000230538

(not to be taken as tax advice)

 

[golfgal]

Thank you for the feedback, everyone.

When she died, they sold her house immediately (DH's sister is a real estate agent) and so the siblings never became owners. I believe the attorney who handled this (and the sale of the car -- same situation -- all done very quickly), had all applicable taxes taken out prior to monies being distributed.

As far as her retirement -- it was a "teachers' pension" -- she wasn't a teacher, but worked for the school system for many years in an administrative position. I want to say that I recall that whatever my DH signed for that, specifically stated that this was not taxable.

There were only a couple of other things -- her bank account and a small life insurance policy.

I think I will follow up with his sister since she handled so much -- we live in a different state (that has no income taxes, btw) and she probably has already gotten the answers to these questions.

Thanks again for your responses.

The PERA pension still is subject to FEDERAL income tax. That money should have come directly to you from the pension fund and you should get a 1099 for that. If the money came in a lump sum to a sibling and the sibling distributed that to everyone, then you are looking at gift taxes if it was over $13,000 or in two checks, one to you, one to your DH totaling $26,000. The only exception would be is if this was a life insurance component to an annuity/pension.

 

[DebbieB]

That is not true. It all comes down to how these items were exchanged/transferred and how the accounts were set up. Even the life insurance could be taxable as income if the account meets certain tests.

When my mom died, there was some interest on the life insurance we were taxed on. It was the interest from the day she died to the day the check was written. We got a form for it.