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As a recipient of an inheritance - the person does not need to claim it as income. Regardless of the value. Please see for reference IRS publication 525 page 34 (left column)- http://www.irs.gov/pub/irs-pdf/p525.pdf
Gifts and inheritances. 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 rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.
What the beneficiary will have to include is an income in respect of a decedent (IRD).Income in respect of a decedent realized AFTER the death is taxable.. Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return.
The distribution from annuity will be taxable for beneficiaries the same way as if it would be taxable for the decedent.
You will report on form 1040 as following:
line 16a - total distribution - from 1099-R box 1
line 16b - taxable part of distribution - from 1099-R box 2a
line 61 - federal income tax withheld - from 1099-R box 4 - that amount will be credited toward your tax liability.
Original contributions will be distributed tax free. Only earnings will be taxable.Thus the amount in box 2a will be reduced by the amount invested into the contract.
Let me know if you need any help.
First of all the distribution from is not an interest income - interest income is reported on line 9a, but distributions from the nonqualified annuity contract is reported on lines 16a and 16b.
Then the taxable portion of the distribution is based on the amount which originally was contributed into that annuity.
Thus, assuming his mother's monthly payment was $2500 for 7 months - total 17500 and the annuity payoff will be $74,000 - assuming divided equally - you may expect form 1099R to report - www.irs.gov/pub/irs-pdf/f1099r.pdf
box 1 - Total distribution - $37,000
box 2a - taxable amount - $28250 - that amount will be included into your husband's taxable income.
Please be sure to ask if you need any clarification.