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My father passed away last year and my uncle was listed as executor of the estate. He liquidated the entire estate and it was released from probate last month. All of the children received an equal share of the benefits of the estate. Is that money considered income, and as such, taxable? Or is it subject to "estate, or inheritance" taxes?

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A more recent article on inheritance taxes than the one cited by @JohnBensin says that Maryland does not charge inheritance tax on inheritances received from parents (and other close relatives as well). Thus, there is no inheritance tax due to Maryland on your inheritance, and of course, estate tax (both Federal and State) is imposed on the estate and payable by the estate, and thus should have been taken into account by the executor before determining the amount to be divided among the children. If the executor screwed up on this point, some of the inheritance may have to be returned to the estate so that the estate can pay the taxes due, or be paid directly to the Federal Government and/or the State of Maryland on behalf of the estate.

Some part of the inheritance might be taxable income to you if it came in the form of an Inherited IRA on which Federal (and possibly State) taxes have to paid on the (taxable part of) any distribution from the IRA including the Required Minimum Distribution that must be made from the IRA each year. (There is also a 50% penalty for not taking at least the RMD each year). Note that the value of the IRA is not taxable income in the year of inheritance, just the money taken as a distribution. Some people liquidate the IRA within 5 years, as used to be required for non-spouse inheritors under earlier tax law, and thus end up paying a lot more income tax than they would have to pay if they went the RMD route.

If your uncle took the help of a lawyer in winding up your father's estate, you are probably OK in that all the rules were likely followed, but if it was a do-it-yourself job (or you don't trust your uncle not to screw it up anyway!), then, as John Bensin has already told you, you should certainly consult a tax professional in Maryland to make sure you don't run afoul of tax authorities.

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Maryland is one of only two states (as of the writing of that article) that collects both inheritance tax and estate tax. These are two different issues, and it's important to differentiate between them sufficiently. I can't provide you a definitive answer, so consult a tax professional in Maryland for specific details to make sure you don't run afoul of tax authorities.

This blog has a nice summary of the differences, as of 2012:

The estate tax is assessable if more than one million dollars passes at death. The total dollar value of the property determines whether there is an estate tax. The inheritance tax is not dependent upon the value of the estate, as even very small estates can have inheritance tax imposed. Inheritance tax is assessed on property given to a person who is further removed in relationship than a sibling. Thus, for example, a 10% tax will be assessed on property passing to a cousin, niece, nephew or friend.

Another section of the page states, as an example:

If you give someone $10,000 in cash, the inheritance tax will simply reduce the amount inherited – in this case to $9,000.

There are several other exemptions to the inheritance tax in addition to the immediate family exception discussed above:

Property that passes from a decedent to or for the use of a grandparent, parent, spouse, child or other lineal descendant, spouse of a child or other lineal descendant, stepparent, stepchild, brother or sister of the decedent, or a corporation if all of its stockholders consist of the surviving spouse, parents, stepparents, stepchildren, brothers, sisters, and lineal descendants of the decedent and spouses of the lineal descendants.

Putting this information together makes me think that the inheritance wouldn't be taxable in your case because it's a cash inheritance from an immediate family member, so it qualifies for one of the exemptions. Since I'm not a tax professional, however, I can't say that for sure. Hopefully these pages will give you enough of a foundation for when you talk to a professional.

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    But by "income", might that page be referring to income produced that year by the estate's underlying assets? (e.g. such as dividends or interest on investments?) -- as opposed to the estate's capital? I agree with the suggestion to consult a professional. – Chris W. Rea Jul 26 '13 at 13:41
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    @ChrisW.Rea The information I posted from the Maryland Register of Wills doesn't make that distinction, and simply refers to "property." Not being a tax lawyer, I'm not sure, but since the inheritance is being given in the form of cash, it sounds like the tax is levied unless it meets one of the exemptions. Turbotax's page on inheritance taxes states that the tax at the state level is levied on "property and cash" too. – John Bensin Jul 26 '13 at 13:54
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    The OP said :"My father passed away last year" therefore it would seem that he does qualify under the list of exemptions: Property that passes from a decedent to or for the use of a grandparent, parent, spouse, child or other lineal descendant... – mhoran_psprep Jul 26 '13 at 15:07
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    @mhoran_psprep Right, I thought one thing and typed another. Corrected. I still recommend that the OP talk to a professional, but on its face, it does sound like the inheritance qualifies for an exemption. I wasn't 100% sure the children referred to didn't include children of the uncle as well, but that's probably not the case. – John Bensin Jul 26 '13 at 15:28
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    @DilipSarwate It wouldn't. Even though it's implied that the OP is asking "is the income I receive taxable?" the question doesn't ask that unequivocally, so I didn't limit my answer to just the taxes the OP would pay. I tried to answer the more general question "is the income taxable?" since I was unsure about which children were being referred to and on its face, that's what the question is asking. – John Bensin Jul 26 '13 at 20:20

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