Paying taxes on money from a will...?

Question

My grandmother died and left me money. My financial advisor(the guy who my grandma left in charge of the money) said I do not have to pay taxes on it because I aquired the money through the death of a family member.

However, I just got a notice from the IRS saying that I now have to pay taxes on it. What the f?

So, DO I have to pay taxes on it?

I have already paid taxes on all the interest that was earned and I am payig taxes on all interest earned on it now as well. I was given this money back in 2005 and the IRS(not the state) just now is telling me that I owe them money!

Answer 1

Was it money from an IRA or 401k?

If it was, then yes, you would have to pay taxes on it.

See a tax professional in your area. "Financial Advisors" give notoriously bad tax advice.

Answer 2

Something is screwy here. The estate should have paid any estate taxes due - and that would only be if the estate was worth over $2 million.

If some of what you got was income from the money AFTER your grandmother died, then that part would be taxable to you, but not the whole amount, just whatever was income.

I'd call the financial advisor and ask him what the money you got was, how much was inheritance and how much was income on the inheritance amount AFTER your grandma died. He should have already given you that info. Then I'd consult a CPA on where to go from here.

Depending on where you live, there could be a STATE inheritance tax on the amount you got. Is it possible that the letter was from the state, not from the IRS which is federal?

Edit: Wayne is right, if it was in something like a 401K or IRA, you'd have to pay taxes - give him the points, he probably has hit the nail on the head.

Answer 3

The estate is responsible for the estate taxes.

The estate is also responsible for the income taxes from the date of death until the asset is transferred.

Typically, an estate transfer to a beneficiary does not transfer the responsibility for either of those taxes .

However, there is the IRD issue. Income with Respect to a Decedent. Some assets have never been subject to income tax when owned by the decedent. Therefore, the tax code assesses the income taxes to the recipient. Typically, these are items such as: IRAs, Qualified Retirement Plans, Tax Deferred Annuities, Installment Notes, etc.

IRD is also called Inherited Income Tax.

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Answer 4

Just a side note. Starting this year, if you inherit a 401K,etc. from a spouse, you can roll the money into your own IRA tax free until you pull the money out. This ends one of the unintended consequenses of the IRA and 401K laws that caused "little old ladies" who were planning on living off their husbands 401K were being taxed at the top tax rates because when their husbands died, they "inherited" the 401K and it was considered a withdrawl. Oops! Gotta love Congress...

Answer 5

1. Yes, any thing you inherit, you don't pay any taxes on it.

2. In the year your grandmother died, someone must file her final income tax return if her income was more than the filing requirements. Also, if she did not file in any of the previous years when she was alive, and had income more than the filing requirement, then again all these returns must be filed; and taxes are to be paid.

3. If on the date of her death, her estate is more than $2 million than estate tax is to be paid. Then if the estate has any income, it must file return till all the assets of the estate are distributed.

4. If estate was less than $2 million and estate tax return was not required, then any income from your grandmother assets (after her death) are distributed as per her will. The person who receives this income money must include it in his own income.

Read IRS notice carefully. Don't take it lightly and take action before the date mentioned on the notice. Talk to your financial advisor, he may be able to explain you. It may be good idea to consult a CPA or tax consultant.

Answer 6

Need to know the source of the money. For example, aside from the excellent answers thus far, if you inherited a property (house, stock, etc.) and it was transferred into your name before it was sold, you may not owe, you may owe something, or you may have a loss.

Need to know the source of the money to give an answer. It may be that you needed to report it, but ultimately would not owe (you could even have a loss).

Answer 7

Mukata' statement #1 is not quite accurate. See the statement concerning IRA's and 401K's and teacher retirement funds.