Inheritances

Whether you inherit your uncle's gold watch or your mother's entire million-dollar estate, you are not taxed on this inheritance. There are no limits to the amount you can inherit tax free.

While the receipt of an inheritance is always tax free, some inheritances may produce taxable income later on. For example, if you inherit a $100,000 traditional IRA, you are not immediately taxed on the inheritance; there's no tax as long as the funds remain in the IRA. However, as you start to withdraw funds from the IRA, you are taxable on this amount. Fortunately, you are entitled to claim a tax deduction for any federal estate tax attributable to this taxable income, called income in respect of a decedent (IRD), which is explained later in this chapter.

Inheritances you receive are tax free. There is no dollar limit on the amount of an inheritance you can exclude from income.

In addition to tax-free treatment for an inheritance, you may also be entitled to a tax deduction from the estate. This occurs when an estate is not settled immediately but operates, receiving income and incurring deductions for income tax purposes. The estate becomes a taxpayer until the affairs of the estate are settled. If the estate's income tax total deductions in its last year are more than its gross income for that year, then beneficiaries who succeed to the estate's property can claim a deduction. This is a one-time deduction that can be claimed only in the year in which, or with which, the estate terminates, whether the year of termination is a normal tax year or a short tax year. The executor of the estate should supply any necessary information to enable you to claim a deduction. The deduction can be claimed only as a miscellaneous itemized deduction subject to the 2 percent of AGI floor.