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Federal tax on interest in inheritance

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RJRinFL

Member
What is the name of your state? Florida is current legal residence.

I'll try to keep this from being too convoluted, but there are a couple of wrinkles.

I have recently discovered unclaimed funds which were escheated to the state of NJ in 1984, originally belonging to a relative who died in 1986. The funds were a conversion from a stock liquidation. I have Letters of Administration dated 1998, and am in the process of filing a claim for those funds. Since the State of NJ holds them in perpetuity, the only issue will be the documentation, which I am getting. One item required, and this may be relevant to the question below, is an updated Letter of Administration dated within one year of this filing. According to the NJ FAQs on their Unclaimed property site, they pay interest on those funds from date of escheat.

The Question is what is the amount to use for federal taxation of the interest, meaning original, accruing to estate inherited in 1998 but funds not discovered at that time, or included in the Amended Letters of Administration, making the date in 2023?

The 1998 letter, which is when I first had the ability to execute the estate? Or, the current letter, considering the funds as part of the estate? When I get the current letter it will be from New York, as an Amended Letter of Administration with an increased authorization. I can't see from date of death, since I had no ability to access them had I known about them. It would seem the current date would be the date of inheritance, the interest possibly being part of the estate. I do know that NJ will issue a 1099-INT when they are paid.

Thanks
 
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LdiJ

Senior Member
What is the name of your state? Florida is current legal residence.

I'll try to keep this from being too convoluted, but there are a couple of wrinkles.

I have recently discovered unclaimed funds which were escheated to the state of NJ in 1984, originally belonging to a relative who died in 1986. I have Letters of Administration dated 1998, and am in the process of filing a claim for those funds. Since the State of NJ holds them in perpetuity, the only issue will be the documentation, which I am getting. One item required, and this may be relevant to the question below, is an updated Letter of Administration dated within one year of this filing. According to the NJ FAQs on their Unclaimed property site, they pay interest on those funds.

The Question is what is the basis to use for federal taxation of the interest?

The 1998 letter, which is when I first had the ability to execute the estate? Or, the current letter, considering the funds as part of the estate? When I get the current letter it will be from New York, as an Amended Letter of Administration with an increased authorization. I can't see from date of death, since I had no ability to access them had I known about them. It would seem the current date would be the date of inheritance, the interest possibly being part of the estate. I do know that NJ will issue a 1099-INT when they are paid.

Thanks
Basis is part of Capital Gains or Losses. Basis would not normally be a factor in interest income. So, unless I am somehow misunderstanding you, the amount that would be taxable income is the amount of interest received.
 

RJRinFL

Member
You're right, I realize I should not have used the word "basis" which does indeed belong in capital gains and losses. I'll edit that, thanks. My meaning was the amount as of date of inheritance, similar but different. Since interest accrued before inheritance, the real issues are whether that is correct in itself, moving the amount to date of inheritance; and secondly, which date I could use, the 1998 Administration or the Amended Administration, which will be sometime this year.
 

Taxing Matters

Overtaxed Member
The estate discovered the funds this year and this year is presumably when it will get the money. Assuming that’s in fact what happens then the estate’s 2023 return is where it will need to be reported. Whether the estate or the beneficiaries actually pay the tax will depend on whether the estate distributes the fund to the beneficiaries before the end of its tax year.
 

RJRinFL

Member
Interesting. I questioned the idea at first because an Estate tax return was filed in 1998, and I assumed it closed. So, this could mean I file a 1041 or an amendment? I'm the administrator and sole beneficiary. The base amount as shown on the Unclaimed property Administrator website is about $19, 700. Interest since then would bring that up quite a bit, though the rate paid probably is low. Let's say maybe $40,000 - $50,000.

Thank you
 

Taxing Matters

Overtaxed Member
Interesting. I questioned the idea at first because an Estate tax return was filed in 1998, and I assumed it closed. So, this could mean I file a 1041 or an amendment? I'm the administrator and sole beneficiary. The base amount as shown on the Unclaimed property Administrator website is about $19, 700. Interest since then would bring that up quite a bit, though the rate paid probably is low. Let's say maybe $40,000 - $50,000.

Thank you
The federal estate tax form (Form 706) is filed just once nine months after the date of death and is based on the value of all the decedent's assets at the time of death. That money was not in the estate at the time and in any event it is way past the statute of limitations for the IRS to now audit the 706. The focus for your problem (at least for federal tax) is income tax. You're correct that you'd file a Form 1041 for the estate to report the interest income. You'd generally want to distribute the money before the end of the tax year if at all possible because if the estate has pay it on its return the tax rates are typically going to be higher than the beneficiaries' tax rates. But if the estate passes the income to the beneficiaries they pay tax on it at their rate, which likely to be lower. And of course lower tax means more money left in the pockets of the beneficiaries. :)
 

RJRinFL

Member
Thank you so much. You really know your stuff. I downloaded the 1041 form and instructions and gave them a quick read. I had originally thought there was a larger deduction, but I'm guessing that's only on the 706. The Unclaimed Property Administration in NJ says in their FAQs that they will send a 1099-INT. Given that I am the sole beneficiary, it appears I need to include that in ordinary interest income on my 1040, which is better from a tax standpoint, as you indicated.

Thanks again. You've pointed me in the right direction.
 

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