Mr. R’s grandmother passed away a few months ago and we’re in the process of getting a small inheritance. I’m not sure of the exact amount but it’s somewhere between 5 & 10k.
What, if any, tax implications do inheritances have for an amount of that size? Our taxes are already going to be new territory for us as my income is untaxed (fellowship stipend) and it’ll be the first year we’re filing as married so I’m just trying to gauge about how much I’ll need to set aside (if anything) from the amount we receive. Time is a bit tight because there are some smallish expenses we’d like to pay off ASAP.
Thanks!
ETA: Sorry if this isn’t even the right question to ask- this is a whole new world for us as up until this point our taxes have been super simple
Generally an inheritance is not subject to income tax unless it is an inherited IRA or 401k or installment sale gain portion of proceeds (i.e. IRD type items which stands for ‘income in respect of a decedent’).
According to the info in the link above (the statements above the key points on the first page), the threshold starts from 2 millions, not 5 millions. (Whatever the limit may be, i.e., either 2 millions or 5 millions, it does not concern me. This number is well too high for me. Also, I should have (but did not in the end by choice) received some inheritance years back. The efforts and pains would be too high for my stomach so I decided to forget about all of my “share” according to the inheritance law.)
Wow I knew it was high but I didn’t imagine it would be anywhere NEAR that! I was thinking more along the lines of like 20k… shows what kind of figures I’m used to dealing with @-)
And thank you for your sympathies. We knew that her health was failing and it was a small miracle she made it to our wedding. Ours was the only grandchild wedding she was able to attend so we’re happy we were able to make that happen (even if our date was not picked for that specific reason).
Clarified with MIL- not from a 401k or anything like that.
For example, the decedent contributed $5000 to a traditional deductible IRA and you inherited it. Since the decedent never paid income tax on it, the person who inherited must report it on her return as taxable income.
Whether or not the decedent’s estate paid estate tax on the assets has nothing to do with whether the person who inherits it has to report it as subject to income tax.
" Whether or not the decedent’s estate paid estate tax on the assets has nothing to do with whether the person who inherits it has to report it as subject to income tax."
I totally agree, you are absolutely right. However, if there are large amounts of money in the estate, it may alter the amount that the person who inherits it collects. And since it’s not from a 401K, nor are there large amounts of money involved, sounds like it shouldn’t be an issue.
“And thank you for your sympathies. We knew that her health was failing and it was a small miracle she made it to our wedding. Ours was the only grandchild wedding she was able to attend so we’re happy we were able to make that happen (even if our date was not picked for that specific reason).”
That is amazing that she made it to the wedding. That is so wonderful that she could come and see everyone.
I agree with everyone. So sorry about your loss, Romani! Also agree that unless the funds are from the relative’s UNTAXED retirement accounts, it’s probably not taxable. H inherited a lot of money from his sister. The only things he is taxed on is the IRA that he inherited–he pays income tax on the required minimum distributions he mades every year from that account. All the other assets he inherited from her were not subject to income tax (or estate tax since it was well under $5 million).
How do you report fellowship income if your institution does not issue W-2?
Just noting that here we are talking about federal income tax only. State death tax may differ. I remember vaguely that there were some states that tax all inheritance without exemption.
It looks like the links above probably address this, but I know when dh was in grad school they changed the rules so that some of his stipend was indeed taxed.
You have to read the rules in each state, though. Like in Maryland, close relatives are exempt from the tax, it doesn’t apply to property, and the descendant has to have been a Maryland resident or owned property in Maryland. So there are a lot of exceptions and loopholes. But I agree that the OP isn’t going to owe any inheritance tax in Michigan.
