Received money after father's death - inheritance or taxable income? How to report 1099-S on taxes?

12 Thanks for the explanation, but I'm still confused. If I put this on Schedule D, doesn't that mean it's a capital gain? And how do I prove what the "stepped-up basis" was at the time of my father's death? Do I need the appraisal paperwork or something?

8 Yes, you report it on Schedule D because it's a sale of an asset, but having zero gain means zero tax. It's important to report it properly so the IRS doesn't think you're ignoring income they know about from the 1099-S. For documenting the stepped-up basis, ideally you would have an appraisal from around the time of your father's passing. If you don't have that, you might use the county tax assessment, comparable sales in the neighborhood from that time, or even the amount your brother paid if it was close to the date of death and a fair market transaction. Keep this documentation with your tax records in case of questions later.

3 Does taxr.ai handle other inheritance situations too? I'm dealing with stocks my grandma left me and I have no idea what I'm doing.

7 I'm skeptical of these online tools. How do you know if they're giving you the right advice? Seems risky for something as important as taxes, especially with inheritance which can get complicated.

15 Yes, it definitely handles inherited stocks too! You just upload your documents and it identifies the inheritance situation. For stocks, it helps calculate the stepped-up basis based on the value at date of death and guides you through reporting any subsequent sales. I understand the skepticism about online tools. What convinced me was that taxr.ai shows you the specific tax code sections that apply to your situation and explains the reasoning. It's not just giving answers without context. Plus, if something seems off, you can always take their analysis to a CPA for verification, which is still cheaper than starting from scratch with a professional.

7 Wait, so this service somehow gets you past the IRS phone queue? How does that even work? The IRS phone system is notoriously awful - I tried calling three times last year and gave up after being on hold forever.

10 Sounds sketchy. Why would I pay someone else to call the IRS for me? Plus, how do you know the advice you get from some random IRS agent on the phone is actually correct? I've heard horror stories about getting different answers from different agents.

19 It uses some sort of callback technology to navigate the IRS phone system. Basically, it holds your place in line so you don't have to stay on the phone yourself. When an agent is about to be available, you get a call connecting you directly. I understand your concern about varying advice from different IRS agents. What I did was specifically ask for the relevant IRS publication number and section they were referencing when giving me information. I wrote everything down, including the agent's ID number (they have one you can request). This way, if there was ever a question later, I could show I was relying on information provided directly by the IRS. It's definitely more official than guessing or relying solely on internet advice.

2 Good point! Which states have inheritance taxes? I'm in Pennsylvania and now I'm worried.

5 Pennsylvania actually does have an inheritance tax! Currently, six states have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In PA, the rate depends on your relationship to the deceased. Transfers to direct descendants (children, grandchildren) are taxed at 4.5%, transfers to siblings at 12%, and other heirs at 15% (with spouses and charities exempt). You should definitely look into this, as you may owe state inheritance tax even if there's no federal tax due to the stepped-up basis rule.

8 Life insurance proceeds paid to a beneficiary due to the death of the insured are generally not taxable income. You shouldn't have received a 1099-MISC for this. The insurance company may have made an error. Contact the company that issued the 1099-MISC immediately and ask them to correct it. If they refuse, you should still report it on your tax return, but you would report it as "Other Income" and then subtract the same amount with a description like "Life insurance proceeds non-taxable under IRC 101(a)" so your taxable income remains correct.

17 Thank you so much! Just called the insurance company and they admitted it was their mistake. They're sending a corrected form. Apparently they have a new person in their tax department who has been making this error on multiple accounts. You saved me a ton in taxes!

This is such valuable advice! I'm actually going through something similar right now with my grandfather's estate. Can I ask what kind of professional you used for the retroactive appraisal? Was it a certified appraiser or did you need someone with specific estate/tax experience? I'm trying to figure out if I should get appraisals done now for some artwork and collectibles he left behind, even though I'm not planning to sell them immediately. Better safe than sorry based on what you went through!

For the retroactive appraisal, I had to use an ASA (American Society of Appraisers) certified appraiser who specializes in estate and tax valuations. Regular appraisers often don't have the specific expertise needed for IRS purposes - you need someone who understands the "fair market value" standard as it applies to estate tax situations. For your grandfather's artwork and collectibles, I'd absolutely recommend getting them appraised now while you can still gather information about provenance, condition, and market conditions at the time of death. Art and collectibles can be especially tricky because values can fluctuate significantly, and the IRS tends to scrutinize these more than standard assets. Look for an appraiser who is ASA or AAA (American Appraisers Association) certified and has experience with estate work. They'll provide documentation that meets IRS standards and can defend their valuation methodology if questioned later. It's definitely an upfront cost, but way cheaper than dealing with an audit situation like I went through!