How to Report Taxable Inheritance Income

If you are the beneficiary of an estate, you must report various distributions to you from the estate as taxable income on your Form 1040 tax return. The distributions can include interest and dividend income, rent income if there are rental properties in the estate, capital gains and income from annuities or retirement plans. Some estate taxes may be deductible as miscellaneous deductions on your personal tax return.

Difficulty: Moderately Easy

Instructions

1. Review the Schedule K-1 of Form 1041, which is normally prepared by the fiduciary of the estate and sent to you after the end of the year. Schedule K-1 shows the various income distributions to you and the instructions explain where to report them on your tax return.

2. Determine if you received income distributions from inherited annuities and retirement plans such as employer plans and IRA accounts. Check with the fiduciary to find out if the estate is large enough to incur an estate tax.

3. Deduct estate taxes, as explained in Internal Revenue Service (IRS) Pub 559, which are attributable to income in respect of a decedent that you must report on your Form 1040 tax return. These estate taxes are deducted as miscellaneous deductions and are not subject to the two percent of adjusted gross income limitation.

4. Check that any capital gains or losses from sale of stock or other property from the estate take into account the restated values on the date of death or the alternative valuation date. In most cases this revaluation will significantly reduce taxable capital gains.

Resources

• Read Pub 559 online at the IRS website.