J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

11.4 Gifts and Inheritances

Gifts and inheritances you receive are not taxable. However, distributions taken from an inherited traditional IRA (8.14), and distributions from inherited qualified plan accounts such as 401(k) and profit-sharing plan accounts (7.14), are taxable, except for amounts attributable to nondeductible contributions made by the deceased account owner.

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Planning Reminder

Gifts You Make

You may have to file a gift tax return if your gifts to an individual within the year exceed the annual gift tax exclusion, which for 2012 was $13,000 (39.2).

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Income earned from gift or inherited property after you receive it is taxable.

Describing a payment as a gift or inheritance will not necessarily shield it from tax if it is, in fact, a payment for your services. Treatment of gifts to employees is covered in Chapter 2 (2.4).

A sale of an expected inheritance from a living person is taxable as ordinary income.

EXAMPLES

1. An employee is promised by his employer that he will be remembered in his will if he continues to work for him. The employer dies but fails to mention the employee in his will. The employee sues the estate, which settles his claim. The settlement is taxable.

2. A nephew left his uncle a bequest of $200,000. In another clause of the will, the uncle was appointed executor, and the bequest of the $200,000 ...