Brother died. Estate included house. House destroyed by volcano...

[Sir Dancelot]

My brother died in 2018, and only his house was not in a trust. A few months later, a volcano destroyed the house. The insurance payment was split between the mortgage bank to pay the mortgage balance, and to my brother's estate.

Because the estate was in probate, the insurance proceeds were placed into a trust account.  When probate was closed, I was the sole heir. In 2019, I closed the trust account and deposited the funds.

The IRS thinks this is taxable income. How do show that it's inheritance income?

Yes, I know, discuss this with a CPA.

[SusanY1 · Accepted solution]

Why does the IRS think this was taxable income? Have they sent a notice or inquiry? Is there a K-1 reporting it as taxable?  We need a bit more information to help, but we'll be happy to try!  

[Sir Dancelot]

My mistake in looking at the transcript. What I do need to look into is an IRA rollover that shows as a 1099 taxable distribution but I deposited it at another institution. I'll be able to handle this myself.

Sorry to waste your time.

[SusanY1]

An IRA inherited from someone other than a spouse cannot be rolled over into your own IRA. It can be transferred to a Beneficiary or Inherited IRA only - but these must be direct trustee transfers and those do not result in a 1099-R. 

If you received a check and later re-deposited it, it will be a taxable transaction.  You will also need to remove the deposit from the IRA. 

Sorry to be the bearer of bad news. 

Do let us know if you have additional questions or concerns.  

[macuser_22]

In addition, If deposited into your own IRA then any amount exceeding  the yearly IRA contribution limits would be an excess contribution.

The most you can contribute to all of your traditional and Roth IRAs is the smaller of:

For 2019, $6,000, or $7,000 if you’re age 50 or older by the end of the year; or
your taxable compensation for the year.

If done in 2019 then the excess must be removed no later than July 15, 2020 (or if you file an extension by July 15, then you have until Oct 15, 2020 to remove).      After that then the excess is subject to a 2019 6% penalty that repeats each year until removed.   If also not removed by Dec 31 2020 there will be another 2020 6% penalty and so on each year until removed.