Are gifts, bequests, or inheritances taxable?

Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rentals, that income is taxable to you. For additional information, refer to Publication 17, Your Federal Income Tax, Chapter 13. If you inherit an Individual Retirement Arrangement (IRA) or proceeds from a retirement (pension) plan, special rules apply. Refer to Publication 590, Individual Retirement Arrangements (IRAs), or Publication 575, Pension and Annuity Income, for further information.

For additional information on this subject see Gifts.

References:

• Publication 17, Your Federal Income Tax
• Publication 575, Pensions and Annuity Income
• Publication 590, Individual Retirement Arrangements (IRAs)

Is the money received from the sale of inherited property considered taxable income?

To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of inherited property is generally one of the following:

(1) The fair market value (FMV) of the property on the date of the decedent's death.

(2) The FMV of the property on the alternate valuation date if the executor of the estate chooses to use alternate valuation. See Form 706 (PDF), United States Estate (and Generation-Skipping Transfer) Tax Return.

(3) The special use valuation for estate tax purposes of qualified real property used for farming purposes or in a trade or business other than farming. However, if an interest in such property is disposed of or ceases to be used in a qualified use during the 10 year period following the decedent's death, additional estate tax is imposed. If the qualified heir elects to pay interest on the additional estate tax, the adjusted basis of the property will be deemed to have been increased, immediately before disposition, by an amount equal to the excess of its fair market value on the date of the decedent's death over its special use value. See Form 706 (PDF), U.S. Estate (and Generation-Skipping Transfer) Tax Return and section 2032A of Internal Revenue Code.

(4) If an election is made to exclude a portion of the value of land from a decedent's gross estate section 2031 (c) (regarding the transfer of qualified conservation easement), the decedent's adjusted basis in the land to the extent the value of the land was excluded from the decedent's gross estate under 2031(c) by reason of the transfer of a qualified conservation easement plus the fair market value of the land to the extent the value of the land was included in the gross estate. For more information on qualified conservation easement see the Instructions for Form 706, U. S. Estate (and Generation-Skipping Transfer) Tax Returnand section 2031(c) of the Internal Revenue Code.

If you or your spouse gave the property to the descendent within one year of their death, see Publication 551, Basis of Assets.

Report the sale on Form 1040, Schedule D (PDF), Capital Gain and Losses. If you sell the property for more than your basis, you have a taxable gain. For information on how to report the sale on Schedule D, please see Publication 550, Investment Income and Expenses.

References:

• Publication 551, Basis of Assets
• Tax Topic 703, Basis of assets
• Tax Topic 422, Nontaxable income

Are proceeds paid under a life insurance contract as defined in IRC 7702 taxable and do they have to be reported as income?

Generally, if you receive the proceeds under a life insurance contract because of the death of the insured person the benefits are not taxable income and do not have to be reported. Any interest you receive would be taxable and would need to be reported just like any other interest received.

However, if the policy was transferred to you for valuable consideration, the amount excluded from gross income, pursuant to IRC 101 (a) (1), shall not exceed an amount equal to the sum of the value of the consideration you paid for the transfer of the policy and other amounts you subsequently paid by the transferee.

References:

• Publication 525, Taxable and Nontaxable Income
• Tax Topic 422, Nontaxable Income

How do I determine how much interest to report on U.S. savings bonds I inherited?

You may have choices, but it will depend on several factors. Before your question can be answered, you'll need to know:

the date of death of the deceased,

the type of bond you inherited (Series EE, Series E, Series I, or Series HH, or Series H),

whether the deceased was reporting the interest yearly or not, and

whether any of the interest was included on the decedent's final income tax return.

Once you have these facts, you can find your answer and any options that may be available by reading the appropriate section of Publication 550, Investment Income, Chapter 1, or call 800-829-1040.

References:

• Publication 550, Investment Income and Expenses

Is deferred interest on a U.S. savings bond (series EE, E, or I) that I inherited taxable to the deceased owner's estate, to the deceased on his or her final tax return, or to me when I cash them?

The deferred interest is not taxable to the estate. It is going to either be reported on the final return of the decedent or be reported by you, depending on the choice you make. If you are the surviving spouse, the choice is made by the executor or administrator of the decedent's estate as to who is responsible for filing the decedent's final return.

You may have choices, but it will depend on several factors. Before your question can be answered, you'll need to know:

the date of death of the deceased,

the type of bond you inherited (Series EE, Series E, Series I, or Series HH, or Series H),

whether the deceased was reporting the interest yearly or not, and

whether any of the interest was included on the decedent's final income tax return.

Once you have these facts, you can find your answer and any options that may be available by reading the appropriate section of Publication 550, Investment Income, Chapter 1, or call 1-800-829-1040.

References:

• Publication 550, Investment Income and Expenses

Can interest from some inherited U.S. savings bonds be included on the decedent's final income tax return and interest from other inherited U.S. savings bonds be included as interest to the beneficiary?

The same method of reporting interest must be used for all saving bonds owned by an individual. If the surviving spouse or executor of the decedent's estate elected to report accrual interest on bonds owned by the decedent and the decedent had not reported interest on saving bonds prior to their disposition or maturity, the surviving spouse executor of the decedent's estate would be required to treat all savings bonds owned by the decedent the same way. If you receive Series EE or Series I bonds from an estate in satisfaction of a specific dollar amount legacy and the decedent was a cash method taxpayer who did not elect to report interest each year, the interest earned after you receive the bonds is your income. The income earned to the date of death plus any further interest earned to the date of distribution of the bonds to you is income to (and reportable by) the estate. You have a choice. You can report the interest on the series EE or series I bonds, which you received in satisfaction of specific legacy, each year or you can report the interest which accrues from the date the bonds were distributed to you until the date you cash the bonds as interest in the taxable year in which you cash the bonds. If you have other series EE or series I bonds, you will be required to treat the interest on the saving bonds received in satisfaction of the specific legacy in the same way that you treat interest on the other savings bonds.

You may have other choices, that will depend on several factors. Before your question can be answered, you'll need to know:

the date of death of the deceased,

the type of bond you inherited (Series EE, Series E, Series I, or Series HH, or Series H),

whether the deceased was reporting the interest yearly or not, and

whether any of the interest was included on the decedent's final income tax return.

Once you have these facts, you can find your answer and any options that may be available by reading the appropriate section of Publication 550, Investment Income, Chapter 1. If additional clarification is needed, you can call 1-800-829-1040.

References:

• Publication 559, Survivors, Executors, and Administrators
• Publication 550, Investment Income and Expenses