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taxes on an inheritance from an annuity


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#1 libbys

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Posted 12 February 2011 - 01:35 PM

During the year of 2010, my husband received a 5,000.00  inheritance check from his deceased Aunt's estate.  His sister is the executor and told us that the monies were from an annuty that was cashed out. Our question is, are we liable for any taxes on this money? We were under the assumption that any taxes owed, would come out of the entire estate. Also there was some mention by my husband's friend that for the year 2010, there were no taxes on inheritances. We live in Ohio. 



#2 Tax_Counsel

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Posted 12 February 2011 - 10:16 PM

libbys said...

During the year of 2010, my husband received a 5,000.00  inheritance check from his deceased Aunt's estate.  His sister is the executor and told us that the monies were from an annuty that was cashed out. Our question is, are we liable for any taxes on this money?

Probably you will pay some tax on that. Here's how it works for federal tax law.

If the estate was subject to any federal estate tax, the estate pays that, not the beneficiaries, unless the estate fails to pay it, in which case the IRS may pursue the beneficiaries to recover the tax. If your aunt died in 2010, then there is no federal estate tax no matter how large her estate was when she died. If she died earlier than 2010, then it matters how large her estate was. But again, the estate takes care of the estate tax issues if the executor is doing her job correctly. The same is true for state inheritance and estate taxes, too, by the way.

Your husband's distribution from the estate of $5,000 is also not income to him for federal estate tax purposes. However, there is more to it. The estate will have to file a federal income tax return if the estate income was more than $600. If the estate distributes assets to the beneficiaries of at least the amount of the income the estate had, then the estate pays no tax on its income. Instead, that income is passed through to the beneficiaries and the beneficiaries include that income on their tax returns. The estate must provide to the beneficiary a Schedule K-1 that tells the beneficiary how much his share of the estate income was. That K-1 thus gives the beneficiary the information needed to complete his return. Annuities are a form of investment in which the income is not taxed when it is earned but instead taxed when the annuity is paid out. Thus, the estate will have income from cashing out that annuity. That income will then pass up to your husband, and he'll end up putting that income on his return. So, he'll want to get the K-1 before he files his return.


#3 knort4

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Posted 14 February 2011 - 04:37 AM

Your husband can check with the annuity company and ask the company directly about his potential tax liability, if there is any. If he receives no tax statements from federal authorities, then he probably doesn't have to worry about it.




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