I inherited $30,000 in a check from my deceased uncle's estate. I thought inheritance wasn't taxable. So why do I owe $5000 now after I entered my k-1?

[DianeW]

Without knowing more detail it's difficult to say, but here is some information that may be helpful.  Check with the preparer of the estate tax return for better clarification.

Inheritance is money or property that was owned by the decedent prior to death, then distributed to the beneficiaries.  If applicable inheritance tax would be paid on the value of property and liquid assets.  This is separate and distinct from personal individual income tax.  Although paid by the estate, the beneficiaries would not again pay tax on the proceeds.

Any sale of property distributed to the beneficiaries would have a stepped-up basis (the value on the date of death) so the gain at sale would be very little if any to report on the individual tax return if sold immediately or very closely in time after death.

Retirement income would be handled differently.  This is usually set up with beneficiaries so any distribution would go directly to the beneficiary, not the estate.  In this case the beneficiary would report the income and pay tax on anything over and above what the decedent may have contributed with "after-tax" dollars. 

The Form 1040-K1 is provided to the beneficiaries with income that was earned or received after the death of your uncle but money he had a right to receive while living and before full distribution to the beneficiaries. 

[dmertz]

$30,000 is quite a bit of income to pass through on a Schedule K-1 (Form 1041), suggesting that it may have been from a taxable distribution made to your deceased uncle's estate from a retirement account.  That would normally appear in box 5 of the K-1 and is becomes taxable to you (at your lower tax rate) instead of to the estate (at 39.6%).

[oldhugie]

Thanks! Box 5 is empty on our Schedule k-1 Form 1041. But box 4a (long term capital gain) says $30,085.When I enter that into turbo that's when my amount due goes way up!

[SweetieJean]

That is certainly what it sounds like.

[DianeW]

This would indicate there were sales of capital assets within the estate.  
I would double check to be sure you did receive the stepped-up basis.  
Also I have assumed the death and distribution occurred very close in time.
It may not feel like it, but long term capital gain does received a special tax rate.

[dmertz]

If the estate sold the non-retirement shares (suggested by oldhugie receiving cash instead of shares), shouldn't it be the estate that claims the step-up in basis?  I suppose it's possible though, that the value of the shares went up $30k between the date of death and the date of sale by the estate, but in that case what happened to the rest of the proceeds from the sale?

[DianeW]

Thanks @dmertz - I agree with your assessment.  Further inquiry should be done with the preparer of the estate return.