How To File An Inheritance Tax Return

If you receive property as a gift or inheritance from someone, you typically do not have to count it as income or report it on your taxes by completing an inheritance tax return. However, if the property you receive generates income for you, such as interest, dividends, or rents, then you will be required to report and pay income tax on the revenue generated from the inheritance.

Insurance Benefits

The death benefit amount in the insurance policy is typically excluded from taxes, but if, in addition to a death benefit, you are also being paid interest on the policy, the interest you earn must be reported on your income tax return. Certain types of insurance benefits with flexible payment amounts (such as universal life policies) may be excluded from taxation if they meet certain requirements. You should always consult with a tax attorney or CPA before determining how to report your income.

Property

The amount of income tax you are required to pay on property depends on the fair market value of the property at the time of your inheritance. If you subsequently sell the property for more than the determined fair market value when you inherited the property, you will be responsible for paying taxes on the gain. There are certain exclusions, particularly if your inheritance is a farm or other type of closely held business property.

Investment Income

While you will not be required to pay taxes on the stocks and other investments you receive as part of your inheritance, you will be required to pay taxes on the interest and dividends you earn from those items. This information can be reported on your regular individual income tax return.

Individual beneficiaries only have to report income on their individual tax returns if the income is distributed to the beneficiaries. If it is held in trust by the estate, then the estate itself must file the return.

Estate Tax Returns

If you are the personal representative of the estate in question, you must file a tax return on behalf of the estate using form 1041 if the estate earns more that $600 in a year. Income that must be reported is similar to that of an individual income tax return: interest, dividends, capital gains, and other sources must be reported. When you file the form 1041 for the estate, a schedule K-1 must be filed with the return for each beneficiary. A copy of the K-1 must also be provided to the beneficiary.


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