I received an inheritance that is not taxable but was reported to the IRS via K-1. Do I report it HOw do I make sure it is not included as taxable incomei?

[pnestel2]

The answer I received were not related to my question

[dmertz]

If income is being reported on a Schedule K-1, it's likely taxable income.  If it's nontaxable income, I don't see why it would be present on a Schedule K-1 at all.

[Opus 17]

It's important to understand that cash you inherit is not taxable, but property or other assets may be taxable.  For example, if the deceased had an IRA with no beneficiaries designated, it would pass to their estate.  If the estate cashes out the IRA and distributes the proceeds, they are fully taxable to the heirs—because IRA funds are not taxed on contributions or gains, they are always fully taxed when they are withdrawn, even by heirs.  This is one of the things that might be reported on a K-1.

Or, if the deceased has an ongoing business that is managed by an estate (such as a writer or musician who gets royalties) that income is taxable to the heirs just as it would have been taxable to the person.  (The estate could pay the taxes, but the estate's tax rate is higher than your personal tax rate, so you save in the end by paying the tax yourself.)

We need to know more about your situation; why did the estate issue a K-1, and where did the money come from.

[pnestel2]

Here are the details associated with my K-1 question. I received a response asking for more information but my reply was rejected .

Re: I received an inheritance that is not taxable but was reported to the IRS via K-1. How do I make sure it not taxed as income in 2023? (Community response)

Thank you for your response. I did not see your response until you mentioned it in your email. How do I know if someone has responded? 

1. I got a K-1 last year, but it was for an inherited IRA, which is taxable, but not until it was cashed out. I did pay the tax when I cashed it out.  I did not receive the K-1 it until 3/24. I had already filed my 2023 Tax return. The money was earned in 2023, but nothing was paid out until 2024.

• Box E is checked. It says this is the final Form 1041 for the estate or trust. L
• Line 1 -Interest $17 
• Line 2-Dividends $12,510. 
• Line 14- Other information, has an E in it, which indicates net investment income $12,127 or the total of lines 1 and 2a. So, this is reporting the Investment income twice. The letter along with it said, this is the only K-1 you will receive. 

2. The executor, my evil brother, is going to send another K-1 this year. Not sure why, since the last one said this is the only K-1 you will receive. Is he screwing with me? This one is for final distribution of my parents' family trust. This will be about $180,000. 

• The distribution this year came from cash out of a Schwab Trust account. It is an inheritance that is not taxable. No Federal tax on inheritance, and Illinois exempts $4m. 

I assume the same boxes and lines will be included. How do I file so that this inheritance is not taxed?

[Opus 17]

"1. I got a K-1 last year, but it was for an inherited IRA, which is taxable, but not until it was cashed out. I did pay the tax when I cashed it out. "

This makes no sense.

If you were the beneficiary of the IRA, you become the owner of an inherited IRA, it would be titled something like "John Smith Jr. as successor to John Smith".  You would get a 1099-R, but only when you withdrew funds.  An inherited IRA (beneficiary IRA) would never be included on a K-1.

Or, if the IRA had no beneficiary listed, it would become part of the estate.  If the estate withdraws the funds and distributes the funds to the heirs, the heirs will get a K-1.  You would get a K-1 for any year that a withdrawal is made, and be responsible for the tax.  

I can't tell from your description what is going on, you may want to have an accountant review your documents and your situation in detail to see if the executor is handling the affairs correctly. 

[dmertz · Accepted solution]

If the estate was the beneficiary of the IRA, a taxable distribution paid to the estate and passed through to estate beneficiaries would be reported in box 5 of the Schedules K-1, Other portfolio and nonbusiness income.  If the estate was not the beneficiary, nothing should have been paid from the IRA to the estate and there would be nothing about the IRA distribution to report on a Schedule K-1.

The amount reported with code E in box 14 does not double the reporting of the income.  It simply indicates that the amount of the income that is to be treated as investment income for the purpose of Net Investment Income Tax on Form 8960.