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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
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A client of mine (I am a tax preparer) had a boyfriend that

Customer Question

A client of mine (I am a tax preparer) had a boyfriend that died during 2014 and, according to his will, left her money in a brokerage account. Since my client lived with her boyfriend she received all of his mail including a form 1099 (tax year 2015) that has a heading of "Client Name, DCD TOD". This 1099 form has the social security number of my client on it and lists $2000 of Exempt-interest dividends and $200 of Ordinary dividends. The money has still not transferred to my client as of today but is expected to in the next few weeks. A 2014 (tax year) final federal and state tax return was filed for the boyfriend.
1) Do I have to file a 2015 (tax year) federal and state tax return for the boyfriend since the form 1099 has his social security number on it and it reports income?
2) Would you answer to question 1) be different if the amount of Ordinary dividends was $50,000?
Submitted: 7 months ago.
Category: Tax
Expert:  Lev replied 7 months ago.

The question is about what is considered income on the estate.

For INCOME tax purposes inheritance is not taxable income in the US regardless the amount - as a recipient of inheritance you do not need to claim it as income. There is no any amount limit.

Please see for reference IRS publication 525 -

Gifts and inheritances. In most cases, 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.


Please be aware that while inheritance itself is not taxable - distributions from retirement accounts (including death benefits) are classified as income is respect of the decedent (IRD) and as such 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.

Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable decedent.

The administrator of the estate (or the trustee in case there is a trust) usually reports taxable portion on K1 which is used when individual tax return is prepared.


So - inheritance itself is NOT taxable and is not taxable when distributed to beneficiaries.

However - income realized by the estate or trust AFTER the death is taxable for the estate or trust and taxable for beneficiaries if distributed.

So - dividends paid AFTER the death are taxable for the estate - and may be passed to beneficiaries on K1.

Customer: replied 7 months ago.
I understand what you are saying but from a practical standpoint if no tax returns are filed that contain the boyfriend's social security number will not the IRS computer system generate a letter of estimated tax based on the form 1099 that was filed by the bank to the IRS (assuming the level of income is high enough for taxes to be owed)?
Expert:  Lev replied 7 months ago.

If income will not be reported - you are correct - that will be a red flag and the IRS will generate a proposed assessment letter.
If the IRS has no other information - the letter will be generate in the name of the deceased person (assuming the IRS would not have any information regarding the death).

Expert:  Lev replied 7 months ago.

What we need to do in such situation

(1) file a FINAL tax return for the deceased reporting all income up to the date of death and

(2) file an estate tax return (form 1041) for the estate reporting all income received after the death.

That is the way to inform the IRS about the death and about IRD.
In additional - if income was actually distributed to teh beneficiary - the estate will issue K1 statement and taxabel income will be passed to the beneficiary and woudl be reported on your clinet's individual tax return.

The character of income would not changed - so if these are qualified dividends or tax free interest - that income will be passed as such.

Let me know if you need any help with reporting.

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