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I'm receiving an inheritance from the death of my grandmother. The money is being distributed from a trust, and I am told that the distributions are going to be reported on K-1 forms and I will need to submit a K-1 form.

What impact can I expect this to have on my tax liability? I file jointly in Rhode Island and Massachusetts since my wife and I live in Rhode Island, but I work in Massachusetts.

I found this explanation of a K-1 form, which says:

These Schedule K-1 forms are a lot like a 1099 or W2: You'll receive one from the trust, estate, LLC, S corp., or partnership, and it breaks down the income you received into various categories. This is where the tax complexity comes in, because some categories of income may be taxed as capital gains, while others are taxed as regular income, and you want to be sure you pay the appropriate tax rate.

I would assume that what I receive from this distribution would be taxed as regular income, but I wanted to make sure - I wasn't clear on whether it would fall under capital gains, as the article mentioned.

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You don't need to submit a K-1 form to anyone, but you will need to transcribe various entries on the K-1 form that you will receive onto the appropriate lines on your tax return. Broadly speaking, assets received as a bequest from someone are not taxable income to you but any money that was received by your grandmother's estate between the time of death and the time of distribution of the assets (e.g. interest, mutual fund distributions paid in cash, etc) might be passed on to you in full instead of the estate paying income tax on this income and sending you only the remainder. If so, this other money would be taxable income to you. The good news is that if the estate trust distributions include stock, your basis for the stock is the value as of the date of death (nitpickers: I am aware that the estate is allowed to pick a different date for the valuation but I am trying to keep it simple here). That is, if the stock has appreciated, your grandmother never paid capital gains on those unrealized capital gains, and you don't have to pay tax on those capital gains either; your basis is the appreciated value and if and when you sell the stock, you pay tax only on the gain, if any, between the day that Grandma passed away and the day you sell the stock.

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