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Chea Romine
Chea Romine, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 197
Experience:  CPA, Managing Partner of medium sized CPA firm specializing in all areas of tax and accounting.
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My father died in 2002. His estate earned interest on life

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My father died in 2002. His estate earned interest on life insurance proceeds that were delayed in being paid out. The estate filed a federal & state return for that interest. The funds were then distributed to me, his daughter (I assume I am a class A beneficiary). Are those distributed funds (over $10,000) taxable to me? If so, are the funds taxed as income or interest?

Chea Romine :

The basic rule of thumb is make sure someone paid tax on the interest, but you only have to pay tax once. So if the estate paid the tax on the interest then as a beneficiary there is no tax to be paid. Life insurance is not taxable to the estate or beneficiary. So if I am reading it correctly you will have no tax due and will not need to report anything on your tax return.

Customer:

Alright, that was my understanding as well. However, the IRS has just sent me a tax bill as an individual for the interest that was earned by the estate and ultimately distributed to me. I will, based on your response, challenge that decision...is there some guidance you can provide concerning my challenging their decision?

Chea Romine :

Do you have the 1099 that the interest was reported on? If so who's social security number is XXXXX it?


 


 

Customer:

No, when I filed the supplemental 1041 Estate return (I was the executrix) I completed the schedule K-1, which did reflect MY social security number. By the by, the Estate filed the return for the additional interest and then the IRS refunded it back to the estate saying nothing was due. Now, as I said, I have received a tax bill as an individual for the interest reported on the Estate return K-1.

Customer:

The K-1, part 3, section 1 (interest income) was completed, but I did not take an eState tax deduction (secion 10), should I have done that? Or filled part 3 in a different manner?

Chea Romine :

To your second point. The interest was ok to be reported on the K-1, part 3 Box 1, what that means is you are choosing to claim the interest on your personal return. So if that is how you prepared the K-1 that is fine and you then list the interest on your personal return and pay the tax personally.

They are correct nothing was due at the estate level the tax is due at the personal level. What I was saying first is the tax just must be paid somewhere and it hasn't been paid by the estate so you will need to pay it on the personal side.


 

Chea Romine :

Depending on all the facts it might be cheaper to pay tax at the personal level so the way you did it might have been best.


 

Customer:

Wouldn't it be a lower tax rate if the Estate paid the tax? Keeping in mind the Estate tried to pay the tax through the amended return, but then the IRS said no tax was due...it confuses me that they want the $$ from me as an individual when the Estate wanted to pay, but they refunded it...

Customer:

Wait, I just saw the second part of your answer, so ignore my f/u with etstae vs personal tax liability. Thank you for your help!

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