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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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Do I pay Federal Income Taxes on money inherited

Resolved Question:

Do I pay Federal Income Taxes on money inherited from a pension? an IRA? a life insurance policy?
Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

Money received from a life insurance policy due to the death of the insured is NOT subject to income taxes.


Money received from a pension, IRA, or other retirement type account due to the death of the original owner IS subject to income taxes to the same extent that it would have been taxable to the original owner. For example, if the IRA consisted of $10,000 of "non-deductible" contributions, $1,000 of "earnings", and $5,000 of "deductible" contributions, you would receive $16,000 but only the $6,000 of earnings and deductible contributions would be taxable.


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Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Is it just federal? Or do states do this also?
Expert:  Jon Andrews replied 11 years ago.

The life insurance answer is the same for both federal and state.


The other items will depend on your state of residence. In general, if you live in a state that has an income tax, it is likely that this will be subject to state tax as well. However, if you will provide me with your state of residence, I will look to see if there is an exception in that state.


jon

Customer: replied 11 years ago.
Reply to Jon Andrews's Post: I live in Pennsylvania. Thank you!
Expert:  Jon Andrews replied 11 years ago.

When you receive a distribution from one of these types of plans, you receive a Form 1099-R that shows the amount that you received. In addition, there is a "code letter" that lets you know what type of ditribution it is, i.e. normal, pre-mature, etc.


When your distribution is due to the death of the original owner, the code is "4". According to the Pennsylvania instructions, this code is NOT TAXABLE for Penssylvania state income tax purposes even though it is for federal purposes.


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Customer: replied 11 years ago.
Do you use a regular form when reporting this for taxes? Such as a 1040? Or is there a separate, special form for reporting income through this?
Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Meaning a pension?