Exemption or exclusion?

To the Editor: Larry asked whether he must report an anticipated inheritance as "income," and whether there may be some "exemption" (Tribune "Mailbag," Jan. 3).
Jan 8, 2013


Your answer referenced the reported "fiscal cliff" change in the estate tax exemption, which didn't address Larry's income tax question.

Internal Revenue Code section 102(a) states: "Gross income does not include the value of property acquired by gift, bequest, devise or inheritance."

The answer to Larry's question is that he does not have to report his inheritance (if realized) as income on his income tax return. This is known as an exclusion, not an exemption.  

Larry should not rely on this as legal advice, because he has not retained me as his attorney.

Roger G. Cotner, Grand Haven



Sorry Roger, but what you've stated is not necessarily true. It depends upon the nature of the inheritance. If it is straight up cash that is received, that may not be taxable. However, other means of inheritance are taxable. The easiest way to explain and understand whether an inheritance is taxable, is to consider if the item would have been taxable to the deceased if they were the one receiving it. For instance, money put into a bank account isn't taxable, however interest earned on said money is. Anyone receiving an inheritance should consult with someone familiar with federal, state, and local tax codes to understand the tax implications that are applicable to their specific situation.


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