Inheritance question

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Traveler
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Inheritance question

Post by Traveler » Sun Oct 27, 2019 12:08 pm

An uncle passed away last year and I recently received an inheritance that is not a lot but more than the gift tax limit of $15K. I, maybe naively, thought that inheritance is not taxable but the information from the estate attorney's office said they will be sending a schedule K-1 during tax season next year. So now I am thinking that this inheritance is taxable, or at least the amount over the gift limit is and maybe I need to quickly change my W2 withholdings or send in a quarterly tax payment to avoid a fee from the IRS for not paying enough throughout the year. If the inheritance is taxable, I will not have met the safe harbor rules.

Does anyone have insight on whether this money is taxable, and how much of it would be taxable? Online research hasn't proven fruitful but maybe I'm not querying the correct issue/phrase.

123
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Re: Inheritance question

Post by 123 » Sun Oct 27, 2019 12:17 pm

For the most part an inheritance is federally tax-free to the recipient in the US. Some states may have an inheritance tax. The indication that you will receive a K-1 indicates that the estate holds some asset that has tax consequences. As long as the estate has not liquidated that asset (which it may or may not be able to do) the tax consequences of the asset pass through to the estate beneficiaries for the time period prior to the final distribution of the estate. So the potential tax consequence is due to the ongoing nature of an asset within the estate, not the estate itself. If you got a complete cash out of your share the day after the death there would be no federal tax obligation on your part for the inheritance. Any federal estate tax is paid by the estate.
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NewMoneyMustBeSmart
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Re: Inheritance question

Post by NewMoneyMustBeSmart » Sun Oct 27, 2019 12:20 pm

Traveler wrote:
Sun Oct 27, 2019 12:08 pm
Does anyone have insight on whether this money is taxable, and how much of it would be taxable? Online research hasn't proven fruitful but maybe I'm not querying the correct issue/phrase.
I don't know if my opinion qualified as insight but I'll share what I would do.

This article https://turbotax.intuit.com/tax-tips/es ... /L93IUc3sC suggests that:
States with an inheritance tax
The federal government does not have an inheritance tax. The six states that impose an inheritance tax include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Of course, state laws are subject to change, so if you are receiving an inheritance, check with your state's tax agency. The tax rates on inheritances can be as low as 1 percent or as high as 20 percent of the value of property and cash you inherit.
I would tentatively assume that if I live in one of the above states, and absent action by the settlor of the source estate of the money, it is taxable for state tax.

I would consider the federal and state separately.

If I didn't live in the state, I'd ask the settlor of the estate to confirm that it is within the lifetime estate gift tax exclusion (it probably is). If so I'd ask for a letter of same.

I'd pay a CPA $200 for 30-45 min of their time to get a clear answer in email.

Gleops2
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Re: Inheritance question

Post by Gleops2 » Sun Oct 27, 2019 12:45 pm

Google "Is an inheritance taxable in ______________?" (your home state of residence).

There is a difference between and inheritance and a gift. Usually, the gift GIVER pays the gift tax, and it is charged against thier lifetime exclusion amount ( about 5.5 million for single people).

The inheritance MAY be taxable by your state. Someone already posted the states that have a tax that the INHERITOR (you) would have to pay. PA is one of those states. In addition, how you are or are not related to the decedent can also determine how much you may pay.


Anyway....inheritances and gifts are NOT income, so you will NOT have to "add it to your income".


Let us know!
Last edited by Gleops2 on Sun Oct 27, 2019 12:49 pm, edited 1 time in total.

JoinToday
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Re: Inheritance question

Post by JoinToday » Sun Oct 27, 2019 12:46 pm

NewMoneyMustBeSmart wrote:
Sun Oct 27, 2019 12:20 pm
...
I'd pay a CPA $200 for 30-45 min of their time to get a clear answer in email.
Generally good advice from previous posters. I do not believe the gift tax is not applicable for inheritances. (but I am not a CPA/tax person)

I would not hire a CPA at this time. Just wait for the K-1 to arrive at tax time. If you do turbotax, enter the data. If you use a CPA, let them deal with it. If this is a one time increase in income and you meet safe harbor requirements for taxes, rest easy.
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Penguin
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Re: Inheritance question

Post by Penguin » Sun Oct 27, 2019 12:53 pm

Use Schedule K-1 to report a beneficiary's share of the estate’s or trust’s income, credits, deductions, etc. on your Form 1040, U.S. Individual Income Tax Return.
Thus if the estate had an asset and earned interest (or other income) it would be reported on K-1.
Jon

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MrBobcat
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Re: Inheritance question

Post by MrBobcat » Sun Oct 27, 2019 1:38 pm

Traveler wrote:
Sun Oct 27, 2019 12:08 pm
An uncle passed away last year and I recently received an inheritance that is not a lot but more than the gift tax limit of $15K. I, maybe naively, thought that inheritance is not taxable but the information from the estate attorney's office said they will be sending a schedule K-1 during tax season next year. So now I am thinking that this inheritance is taxable, or at least the amount over the gift limit is and maybe I need to quickly change my W2 withholdings or send in a quarterly tax payment to avoid a fee from the IRS for not paying enough throughout the year. If the inheritance is taxable, I will not have met the safe harbor rules.

Does anyone have insight on whether this money is taxable, and how much of it would be taxable? Online research hasn't proven fruitful but maybe I'm not querying the correct issue/phrase.
You might have taxable income or you might not. You might even have capital losses passed through the K-1. It entirely depends on the nature of the assets in your uncle's estate. If part of it was retirement accounts that were paid to the estate, that part will be taxable. Interest/dividends earned during probate will also be taxable. If his residence was sold there might actually be a capital loss from the selling expenses. Attorney, accounting and PR fees can also decrease the taxable income. As far as estate principle such as bank/savings accounts etc, no those won't be taxable.

Best place to get an idea of how much taxable income (or not) that will show up on your K-1 is to ask the estate attorney's office who will be preparing and sending you the K-1.

Gill
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Re: Inheritance question

Post by Gill » Sun Oct 27, 2019 1:42 pm

We’re you left a specific dollar amount or was it a share of the estate? For example, if you were left a cash bequest of $20,000 there would be no tax ramifications at all but if you were left 10% of the estate you might be responsible for 10% of the income earned by the estate.
Gill
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MrBobcat
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Re: Inheritance question

Post by MrBobcat » Sun Oct 27, 2019 1:44 pm

Gill wrote:
Sun Oct 27, 2019 1:42 pm
We’re you left a specific dollar amount or was it a share of the estate? For example, if you were left a cash bequest of $20,000 there would be no tax ramifications at all but if you were left 10% of the estate you might be responsible for 10% of the income earned by the estate.
Gill
I would suspect that the fact that they are sending him a K-1 it is not a specific bequest.

Gnirk
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Re: Inheritance question

Post by Gnirk » Sun Oct 27, 2019 1:52 pm

When my mom's estate was settled, the beneficiaries each received a K-1, detailing the income and expenses to the estate that had occurred since the day of my mother's death and the final settlement of the estate. In our case, there was a slight net loss. If there had been a net gain, each beneficiary (there were only two of us) would have been responsible for paying the taxes on that gain.

In Washington, we do not have a state income tax, nor does the state tax an individual's inheritances.

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Re: Inheritance question

Post by Gill » Sun Oct 27, 2019 2:48 pm

MrBobcat wrote:
Sun Oct 27, 2019 1:44 pm
Gill wrote:
Sun Oct 27, 2019 1:42 pm
We’re you left a specific dollar amount or was it a share of the estate? For example, if you were left a cash bequest of $20,000 there would be no tax ramifications at all but if you were left 10% of the estate you might be responsible for 10% of the income earned by the estate.
Gill
I would suspect that the fact that they are sending him a K-1 it is not a specific bequest.
I’m not talking about a specific bequest but rather a general bequest of a specific dollar amount. I suspect OP has received a share of the residuary estate. It is entirely possible the K-1 could show excess deductions rather than income to be reported.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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MrBobcat
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Re: Inheritance question

Post by MrBobcat » Sun Oct 27, 2019 3:14 pm

Gill wrote:
Sun Oct 27, 2019 2:48 pm
MrBobcat wrote:
Sun Oct 27, 2019 1:44 pm
Gill wrote:
Sun Oct 27, 2019 1:42 pm
We’re you left a specific dollar amount or was it a share of the estate? For example, if you were left a cash bequest of $20,000 there would be no tax ramifications at all but if you were left 10% of the estate you might be responsible for 10% of the income earned by the estate.
Gill
I would suspect that the fact that they are sending him a K-1 it is not a specific bequest.
I’m not talking about a specific bequest but rather a general bequest of a specific dollar amount. I suspect OP has received a share of the residuary estate. It is entirely possible the K-1 could show excess deductions rather than income to be reported.
Gill
The OP wouldn't be getting a K-1 if they were only receiving a general bequest of a specific dollar amount? Correct? Also are excess deductions even deductible by individuals anymore after the Tax Cut and Jobs Act?

Gill
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Re: Inheritance question

Post by Gill » Sun Oct 27, 2019 3:21 pm

MrBobcat wrote:
Sun Oct 27, 2019 3:14 pm
Gill wrote:
Sun Oct 27, 2019 2:48 pm
MrBobcat wrote:
Sun Oct 27, 2019 1:44 pm
Gill wrote:
Sun Oct 27, 2019 1:42 pm
We’re you left a specific dollar amount or was it a share of the estate? For example, if you were left a cash bequest of $20,000 there would be no tax ramifications at all but if you were left 10% of the estate you might be responsible for 10% of the income earned by the estate.
Gill
I would suspect that the fact that they are sending him a K-1 it is not a specific bequest.
I’m not talking about a specific bequest but rather a general bequest of a specific dollar amount. I suspect OP has received a share of the residuary estate. It is entirely possible the K-1 could show excess deductions rather than income to be reported.
Gill
The OP wouldn't be getting a K-1 if they were only receiving a general bequest of a specific dollar amount? Correct? Also are excess deductions even deductible by individuals anymore after the Tax Cut and Jobs Act?
Correct. No K—1 for a general cash bequest. As for the deduction of excess deductions, my understanding is that the IRS is still wrestling with this question.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

MarkNYC
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Re: Inheritance question

Post by MarkNYC » Sun Oct 27, 2019 6:08 pm

Traveler wrote:
Sun Oct 27, 2019 12:08 pm
An uncle passed away last year and I recently received an inheritance that is not a lot but more than the gift tax limit of $15K. I, maybe naively, thought that inheritance is not taxable but the information from the estate attorney's office said they will be sending a schedule K-1 during tax season next year. So now I am thinking that this inheritance is taxable, or at least the amount over the gift limit is and maybe I need to quickly change my W2 withholdings or send in a quarterly tax payment to avoid a fee from the IRS for not paying enough throughout the year. .

Does anyone have insight on whether this money is taxable, and how much of it would be taxable? .
As already mentioned, the inheritance itself is not taxable to you. The fact that you're receiving a K-1 from the estate indicates that the estate had taxable income or losses for the tax year that is being passed through to you as part of the distribution you received. Unless a large portion of the distribution you received represents IRA income, I would guess that no more than 10% of the amount you received will be taxable income. Quite possibly a lot less than 10%.

Freetime76
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Re: Inheritance question

Post by Freetime76 » Mon Oct 28, 2019 6:55 pm

+1 for the K1 possibly being a loss, which you could use/carry over from year to year to help reduce your own taxes. Ask the attorney/whoever is doing the estate accounting... For example, this could be a loss (on paper) from the sale of a house where appraised value for the estate was higher than the proceeds from a sale (after subtracting expenses like realtor fees).

NotWhoYouThink
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Re: Inheritance question

Post by NotWhoYouThink » Mon Oct 28, 2019 7:10 pm

Can you ask the executor whether you should expect much taxable income from the estate tax return? In some families, the executor would be keeping on top of things and keeping everyone up to date. In others, the executor runs everything through the attorney. And in others chaos develops. If you have the first kind of family you might be able to get a guesstimate.

HeelaMonster
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Re: Inheritance question

Post by HeelaMonster » Mon Oct 28, 2019 7:51 pm

With respect to state inheritance tax, I believe it is the state where the DECEDENT lived (or owned the property in question) that governs... and not the state where the heir(s) live. So the relevant state in this scenario is where OP's uncle lived.

In my case, I owed a small amount of tax to the state where my "uncle" lived, on the interest that had accrued between the date he died and the date proceeds were finally disbursed to me and other heirs.

Gill
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Re: Inheritance question

Post by Gill » Mon Oct 28, 2019 8:22 pm

HeelaMonster wrote:
Mon Oct 28, 2019 7:51 pm
With respect to state inheritance tax, I believe it is the state where the DECEDENT lived (or owned the property in question) that governs... and not the state where the heir(s) live. So the relevant state in this scenario is where OP's uncle lived.

In my case, I owed a small amount of tax to the state where my "uncle" lived, on the interest that had accrued between the date he died and the date proceeds were finally disbursed to me and other heirs.
We’re not talking about inheritance tax. In your example, the estate owed income tax, not you, because the estate had a situs in that state.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

HeelaMonster
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Re: Inheritance question

Post by HeelaMonster » Tue Oct 29, 2019 10:52 am

Gill wrote:
Mon Oct 28, 2019 8:22 pm
HeelaMonster wrote:
Mon Oct 28, 2019 7:51 pm
With respect to state inheritance tax, I believe it is the state where the DECEDENT lived (or owned the property in question) that governs... and not the state where the heir(s) live. So the relevant state in this scenario is where OP's uncle lived.

In my case, I owed a small amount of tax to the state where my "uncle" lived, on the interest that had accrued between the date he died and the date proceeds were finally disbursed to me and other heirs.
We’re not talking about inheritance tax. In your example, the estate owed income tax, not you, because the estate had a situs in that state.
Gill
OK, my bad. There were so many references to state inheritance tax in preceding posts that I thought this a central question, and I know that "whose state matters?" is often a point of confusion.

[ETA: It took me a bit to find in taxes from 2013, but in my case we DID have an amount from the K-1 for estate that was added to our taxable income. In other words, we did pay taxes out of our own pocket, on proceeds from the inheritance.]

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