Last year, an aunt of mine passed on and I and my siblings each inherited some money. I work at a law firm, and I asked an estate planning attorney there if I as the inheritor would owe any taxes on this money and was told “no, none at all. The estate pays all taxes.” So I put the money in a CD.
Now we get a “K-1” from the estate, and when we enter the data from it on our tax return, we do indeed owe taxes on this inheritance - a few thousand dollars! Assuming the estate was executed properly, what the hell? Tax has to be paid twice? Once by the estate and once by the beneficiary?
Are you sure you got the right type of K-1 and are entering the infomation in the right place? There is more than one kind of K-1 - there’s (at least) a partnership K-1 and a trust income K-1. Perhaps you got the wrong one or are putting the numbers in the wrong place?
What is the form number given on the K-1 that you got?
Lessee, I’ve got it right here. It’s a Schedule K-1 (Form 1041). There’s no form number at the bottom, but at the upper right hand corner there’s a number OMB No. 1545-0092. The formal title of the form is “Beneficiary’s Share of Income, Deductions, Credits, etc.”, and the box containing the amount upon which tax is owed is called “Other portfolio and nonbusiness income”. My best guess is that it is considered income, and that the income is taxed, i.e., it’s not an “inheritance tax”. My husband is entering it using Turbo Tax, and my sister went to H&R Block and came up with the same answer.
I read the instructions for that form and it appears that it’s for income earned by the estate. So if the funds in the estate earned interest from the date of death until you received the money, you’d be responsible for the taxes on that. Of course, I’m not an attorney, and you should probably ask the same estate attorney.
That is the right K-1. But I don’t know what the story is with thousands of dollars of tax being owed. Can you ask the estate attorney at work what the deal is?
Oh, and you are entering it on the correct line on your return? The line for inheritances, not the line, for example, for interest income or porfolio earnings?
The estate planning attorney came in to the office and we talked again. Dewey Finn, you called it. The assets of the estate earned income, and we owe tax on that income. He said that the beneficiary is often issued two checks, one for the inheritance distribution and one for any estate income. I received a “combined” check, so I was unaware that part of that check would be taxable. I do note that the estate’s attorney never made this distinction when the check was mailed - it would have been nice of him to drop a hint, I guess.