inheritance K1

[barbsmith35]

I received an inheritance this year (2024) and just received a K1 for tax year 2023. (The taxable income portion that I need to claim for last year 2023).  This K1 amounts to over 50% of my total inheritance.  This seems very high to me, but my question is:  From a quick run through of filing my taxes with the addition of this form, I will owe over $40,000 between federal and state income taxes.  Obviously I have no problem with paying my taxes, although I find it hard to believe that 50% of my inheritance was money earned the year after the death of my family member, but will I have to pay a penalty to both the IRS and my State? It doesn't seem fair to be penalized over something I had no control over and had no idea this would be taxable.  Again, I only got the inheritance this year right before April 15th and understood that the amount is well under what is taxable inheritance tax.  Quick note:  I put in for an extension on April 15th, and at that point in time, I paid what I would have owed without this K1.  So this $40,000 is only taxes on this K1 income.

[dmertz]

Your questions should be directed to the executor or personal representative of the decedent's estate.  If there was going to be a large amount distributed to you from the estate that was going to be taxable in 2023, the executor or personal representative should have coordinated with you so that you could make the necessary estimated tax payments.

Check the end date of the tax year on the Schedule K-1.  If the end date is in 2024 (with the estate using a fiscal tax year), the income is reportable on your 2024 tax return, not your 2023 tax return.  For the purposes of annualizing income on Form 2210 to minimize any tax underpayment penalty, I would treat the income as received on the end date of the estate's tax year.

There could easily have been a large amount of taxable income to the estate if there was a sale of property by the estate that resulted in taxable capital gains or a distribution to the estate from an tax-deferred retirement account.

[barbsmith35]

It is calendar year 2023.  We were told by the executor to get an extension, because we'd be getting a K1 from the accountant for the estate.  We were told they had no idea what the taxable amount would be until after the accountant filed the taxes for the estate. We were just told that it shouldn't be much.  So my question is still, will I have to pay penalties to both Fed and State?  Seems unfair to have to pay before you even know what you owe.  I received the inheritance just this year (2024)

[dmertz]

The executor could have done a better job of estimating and managing taxable income, perhaps by coordinating better or earlier with the accountant and with beneficiaries.  You could potentially apply for penalty relief:

https://www.irs.gov/payments/penalty-relief-for-reasonable-cause

There is probably something similar for your state.

[Mike9241]

@barbsmith35 consult a professional. That $40K in additional taxes could subject you to substantial understatement penalties.

For individuals, understating your tax liability by 10% of the true amount or by $5,000, whichever is higher

The substantial understatement penalty amount is calculated using the value of the amount understated on your tax return. The penalty equals 20% of the amount that was underpaid.

then there are other penalties for late payment and interest charges.

whether or not you can take any action against the executor is a matter you'll have to discuss with a lawyer. 

[dmertz]

@Mike9241 , there appears to be no understatement of tax liability, only an insufficient amount of tax withholding and estimated tax payments.  It appears that the 2023 individual tax return has yet to be filed and when filed will show the correct tax liability with the inclusion of the taxable amount shown on the Schedule K-1.

[Mike9241]

@dmertz read too fast and missed that a extension was filed. However, that raises a different question as to whether or not the extension was valid becuase apparently it did not reflect that additional $40K due, 

[dmertz]

The extension is valid if it was requested by April 15, avoiding a late filing penalty, but it's quite likely that the amount paid by April 15 will not have been 90% of the eventual tax liability, so it won't qualify as an automatic reasonable cause to avoid a late payment penalty for the period beyond April 15.