Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

August 12, 2013
Is there an income tax impact from an inheritance?

Q: My parents passed away in 2007. The succession of their estate was completed in 2008. In March 2013 I searched the missingmoney.com web site and discovered that the state of Maryland had unclaimed property belonging to my parents. The property was Lockheed Martin Corporation stock. The stock was sold by the state after receiving it. I filed a claim and received a check. Is there an income tax impact from this inheritance?

M. Doyle
El Dorado Hills, CA

A: In most circumstances, inheriting money or property from a decedent does not create an income tax liability. Taxable income for income tax purposes does not include money or other property inherited from a decedent unless the money or property was not previously taxed, as in the case of an IRA or 401(k) account, for example.

For the purposes of this answer, I am assuming that the stock was not held in an IRA or deferred compensation account. There may be some taxable income to report if the money you received includes income earned by the inherited funds after the date of the decedent's death. But the original amount of money or property that you inherited is usually not taxable.

In the situation you describe, the state sold the property and you received the funds. If the stock changed in value between the date of your parents' deaths and the date of the sale, there may have been gain or loss. Your "income tax basis," the starting point for calculating gain or loss, would have been the stock's value on the date of your latest parent's passing (assuming the stock was includible in their estate). If the net sales price was more or less that the date of death value, there would have been gain or loss to report.

In most cases, there is a 3 year statute of limitations on the assessment of additional federal income tax (4 years for California). So if the sale by the state occurred in a year that is barred by the statute of limitations, you cannot report the gain or loss, in most cases. If the sale occurred in a year for which the statute is still open, you should amend your income tax return to report the gain or loss.

If the sales proceeds from the stock were large enough, there may be a 6 year statute of limitations. If a taxpayer omits from gross income more than 25% of the gross income that is reported on their tax return for that year, the statute of limitations is increased to 6 years.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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