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?
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.