taxes on 401k inheritance
by Justinbc6 » Wed Feb 05, 2014 1:13 pm
My Dad passed away earlier in 2013. I don't think I have to file an estate tax return because his assets were in the 6 figure range. But I just want to make sure all bases are covered. He was divorced so my brother and I were written a check for his 401k holdings. (We were told we couldn't roll it over because we weren't actually beneficiaries) The check was written to the executor and the estate and we have received a tax form addressed the same way.
Does this need to be filed as something other than estate tax? Possibly income for my brother and I, or even on my Dad's final taxes?
Any help, as always, will be appreciated.
Justin
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Re: taxes on 401k inheritance
by placeholder » Wed Feb 05, 2014 2:22 pm
Depends on whether the estate paid income tax on it (you usually don't want that) or the tax burden was distributed out as a K1.
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Re: taxes on 401k inheritance
by pshonore » Wed Feb 05, 2014 2:37 pm
Sounds like should one should be doing a 1041 Estate return for your Dad's estate. His executor should prepare a normal 1040 type return covering income and deductions, etc through the date of his passing. The 1041 will cover income, deductions, etc from his passing until the estate is settled and distributed. (not to be confused with a Form 706 Estate Tax Return when Federal Estate tax is due). Most likely someone will owe tax on the 401K balance.
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Re: taxes on 401k inheritance
by jebmke » Wed Feb 05, 2014 2:42 pm
pshonore wrote:Sounds like should one should be doing a 1041 Estate return for your Dad's estate. His executor should prepare a normal 1040 type return covering income and deductions, etc through the date of his passing. The 1041 will cover income, deductions, etc from his passing until the estate is settled and distributed. (not to be confused with a Form 706 Estate Tax Return when Federal Estate tax is due). Most likely someone will owe tax on the 401K balance.
That's what I thought. A fairly simple estate would distribute the funds and the estate would get a credit against the income for the distribution and pass the income to the beneficiaries on a K-1. Ideally the executor can do this all in one tax year.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: taxes on 401k inheritance
by Justinbc6 » Wed Feb 05, 2014 3:29 pm
thanks everyone! The CPA who is doing my taxes this year had initially said that nothing needed to be filed on the estate. But when I told him what you guys said, he changed his mind... maybe I need someone who pays closer attention next time.
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Re: taxes on 401k inheritance
by jebmke » Wed Feb 05, 2014 3:46 pm
He may not have to file a 1041. He should look at the 1041 instructions. It will explain who has to file.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: taxes on 401k inheritance
by Alan S. » Wed Feb 05, 2014 3:56 pm
Justinbc6 wrote:thanks everyone! The CPA who is doing my taxes this year had initially said that nothing needed to be filed on the estate. But when I told him what you guys said, he changed his mind... maybe I need someone who pays closer attention next time.
Yup. To understand what is coming, check with the executor to determine when the estate will or has terminated, and whether the 2013 K1 forms are final (also shows on the form itself). It is was unfortunate that you were not named beneficiary on the plan itself as you would then have been able to roll your share over to an inherited IRA and other than RMDs, you could stretch the account such that you won't be hit with a large distribution in a single year as has occurred here.
While unlikely, if the estate was large enough and he lived in certain states, there could be state estate or inheritance taxes involved. Check with his state. Most of these states are in the NE, particularly NJ which has a state credit of only 675k. The executor is responsible so should be able to confirm that no estate or inheritance taxes apply, and then your only concern would be the income tax generated by the K1.
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