Taxpayer asks:
Dear Taxgirl,
My sister and I inherited our father’s farm when he passed away. He had already contracted for the sale of the crops before he died but we did not receive the crop payment until shortly after his death. Is this crop payment part of the inheritance or do we pay income tax on it?
Thank you.
Taxgirl says:
Inheritances are tricky. While there may not be federal income tax payable upon the receipt of an inheritance, that doesn’t mean that there aren’t any income tax consequences.
We like to think of tax years in terms of calendar years but that’s not always the case with an inheritance. Think of the tax pieces as though you could plot them on a line:
Income that is attributable to the decedent beginning on January 1 (just like always) until the date of death is taxed to the decedent. Income that is earned or accrued after the date of death is taxed to the beneficiaries, either individually or as part of the estate (fiduciary income tax can be tricky so I’m lumping estate/beneficiaries together for our purposes).
Income is typically considered income whenever it is paid out or constructively received. You’re considered in constructive receipt when the money is made available to you, or put another way, if you could have taken the money but you didn’t – for example, a paycheck that sits in a desk.
If, under the contract, the money was due and payable to your father before his death, then it would be taxable on his final income tax return (think of that like a last paycheck or interest that was owed before death). If, however, the money was not due until the performance of services or the passage of time, then it would be taxable when received to the estate or to the beneficiaries (depending on the circumstances). It doesn’t escape income tax either way.
Sometimes, income can be tricky to characterize and when and to whom the income is payable (estate versus beneficiary) may hinge on the titling of the assets or whether the income was attributable to a probate or nonprobate asset. There may also be estate or inheritance tax due (separate from income tax). Since, as I noted before, fiduciary income accounting and taxation can be complicated, I would suggest consulting with a tax professional.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
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