When a person dies & they have a 401k what state are taxes paid in or is it only federal taxes that are owed?

Question

the beneficiary is spliting the money with sibilings and needs to know what state to pay taxes in. the owner of the 401k lived and died in arkansas and the benificiary in arizona. at what rate are they taxed state and federally

Answer 1

Under the circumstances you seem to have described the beneficiary will be subject to tax based on that portion of the 401K that had not been taxed up to the date of death of the donor.  The beneficiary is subject to federal tax and the state taxes where they live (which seems to be Arizona).  The Federal government nor Arizona impose any inheritance tax or gift tax.  Therefore the beneficiary is only subject to income tax.  To be fair they should calculate those taxes and distribute the remainder.  I do those calculations for people frequently.

Answer 2

Income tax would apply when the money is distributed.  That might either be over 5 years or over the lifetime or life expectancy of the beneficiary depending on the plan and the choice of the beneficiary (if there is a choice).

State income tax would be based on state where a beneficiary lives.  But I don't know how that all falls into place if there is actually one beneficiary distributing that to other siblings.  There may be a tax advantage to naming all the beneficiaries, so each one would pay their fair share of tax, instead of that burden falling on a single named beneficiary who gifts a portion of that to the others.

Answer 3

The 1 beneficiary is getting all the money and reporting all of it on his tax returns.  The money he is distributing to the other family members are GIFTS.  There is no income tax to the recipient of the GIFT.   If he gives more than $12K, the giver needs to file form 709.

(Hint, the giver needs to figure out how much he'll have AFTER taxes and then split the money.  The rate, of course is affected by how much other income he has.)