Do I need to report an inheritance on my tax return?
Generally speaking, no. The IRS doesn't impose an inheritance tax and only a handful of states (Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee) impose some kind of inheritance tax.
Having said that, if you inherit property that produces income such as interest, dividends, or rent, that extra income should be reported on your return.
If you inherited an IRA (individual retirement account) or a qualified plan such as 401(k), the amount is taxable either in the current or future year with some exceptions.
TurboTax asks questions to determine how much may taxable for the current year. For additional information on an inherited IRA, see IRS Publication 590 and for an inherited pension plan, see IRS Publication 575.
To determine if the sale of inherited property (such as a house or stock) is taxable, you must first figure out the basis in the property. The basis of inherited property is generally one of the following:
- The fair market value (FMV) of the property on the date of the decedent's death or
- The FMV of the property on the alternate valuation date if the executor of the estate chooses an alternate date
If you sell the property for more than the basis, then you will have a gain. The gain or loss is the difference between sales price less sales expenses and the basis. You will report the gain or loss on Schedule D of your tax return. The holding period is considered long-term (more than 1 year). For the date of acquisition, you would enter the word INHERITED.
Completing a Schedule D in TurboTax requires either the Premier or Home and Business edition.
Life insurance proceeds paid to a beneficiary because of the death of the insured are not taxable unless the policy was turned over to the recipient for a price.
Also veteran’s insurance proceeds are not taxable to the beneficiaries.
If the insurance is received in installments, the part that is interest income may be taxable.
You don’t pay tax on the inherited land until you sell it. When you sell it, the gain or loss will be reported on Schedule D. Schedule D requires the TurboTax Premier or Home and Business edition.