Inheritance by my spouse from her sister

[ChuckBeckBoomer]

My wife's sister passed away on July 2nd and she is the only sibling.  Her sister never married and has no children.  In the will, my wife is the only living heir.  My wife is selling the car and house.  My wife is also the only beneficiary on the life insurance policy and the retirement account.  Our question is on these items listed; do we have income tax liability for 2023, since it is from a death of a family member?  Thank You!!

[rschule1]

Hi there:

Condolences on your sister in law:

1)Life insurance-If paid in one lump sum-Not Taxable.

2)Inherited retirement account-Taxable. Report amount distributed from the retirement account per form 1099R in the year received.

3)Real Estate- Could be taxable, but maybe not. Report disposition in the year of sale on your tax return. Your cost basis is the same as your sister law's at her date of death. Gain or loss will be sales price less cost basis.

4)Car-Not taxable- Assuming the car depreciates .

[marctu]

So my deepest sympathies for your wife's and yours loss.   So when someone passes away assets, such as the house, the basis or the value, would be the fair market value as of July 2nd.  So the house would most likely have no tax impact.   The car gets this same stepped up basis, so again there is most likely no tax impact.  

Generally, life insurance proceeds your wife would receive as a beneficiary due to the death of the insured person, aren't includable in gross income and they also don't need to be reported.  

So what remains is the retirement account.  This would would be taxable income to your wife if pre-tax dollars were used to fund the account.  If post-tax, which is called a Roth IRA or 401K, then there would not be a tax impact

The inherited account must be fully distributed by Dec. 31 of the 10th year following the year the participant dies, which is the 10-year rule for decedent retirement accounts.  Your wife could take a lump sum or take an annual RMD, which would be taken over the her life for up to 10 years.