I am getting an inheritance of under $10,000. What's up with the Schedule K-1 1040?

Question

The lawyer wants me to sign a form to forward my SS to the IRS with this K-1. Am I liable for taxes paid to the government on this inheritance?

Answer 1

The IRS does not tax inheritances.  The federal government taxes the estate and those taxes are paid by the estate (in this case, by the lawyer, using the estate's money), not by the recipients.  Some state governments do tax the recipients on what they receive, but the IRS (federal) does not.

Answer 2

There is no tax on inheritances.  Read: http://taxipay.blogspot.com/2008/02/tax-...  

However, if the money that you are receiving was taxable in the hands of deceased, then it is taxable in your hands.

Answer 3

Most likely, there is an estate tax return for the estate that you are inheriting from.  Some estates have to file a tax return and document the distributions from the estate using Form K-1.  You need to provide your SSN to the person preparing the estate tax return.

You will be issued Form K-1 from the estate.  This form is used in preparing your tax return.  If the estate has taxable income from the amount that went into the estate (for example, the money in the estate has earned interest, dividends, capital gains),  and that income is passed to you, you may owe tax on those amounts.   You may or may not owe tax on other distributions from the estate, depending on the nature of the money that went into the estate.  

When the K-1 is issued to you, you can ask the estate attorney to explain it to you.  Take your K-1 to a tax preparer, or use it yourself in your tax preparation software, when you have your 2008 taxes prepared.

Answer 4

A K-1 is the reporting form for (most likely) a 1041 tax return that is being prepared for some sort of trust in which the assets of the estate were held.  With that K-1 you report any income you may have from the estate.  Some of that income may be subject to income tax to you.  You are liable for income tax on assets that were tax deferred (such as IRAs), gain on property after the date of passing, income to the estates after the date of passing (if not paid by the estate) and in some states, state inheritance tax.