The personal representative who handled the decedent’s estate will also probably assist in coordinating the tax reporting requirements for the decedent, his or her estate, and a surviving spouse, dependents, and beneficiaries.
Gifts, bequests, and inheritances received are not included in the receiving person’s taxable income. But if the property you receive yields income, such as interest, dividends, or rent, that income would be taxable to you. And if what you receive as a gift, bequest, or inheritance is in itself taxable income, you will have to report it on your tax return.
Income in Respect of The Decedent
All the income the decedent would have received had death not occurred and that cannot be reported on the decedent’s final income tax return, is considered income in respect of the decedent. This income must be reported by:
The decedent’s estate,
The beneficiary, or
Any person to whom the estate distributes the property.
If you have to include income in respect of a decedent on your individual income tax return, you may be able to claim a deduction for estate tax paid on that income, if an estate return is filed.
Whether or not you have to report income in respect of the decedent depends on whether the decedent was reporting for tax purposes on a cash basis or accrual basis. If reporting was on a cash basis, any payments received after the date of death would be income in respect of the decedent. They would have to be reported by the person who the estate assigned to right to collect, if payment had not yet been made by the time the estate was settled.
If the decedent was on the accrual basis and had earned the income before death, then that earned income would be reported on the decedent’s final income tax return, regardless of when or who collected it.
If a person was entitled to a large salary payment at the time of death, that was to be made, for example, in four annual installments, and after receiving two of these installments, the estate transferred the right to receive the other two installment to you as beneficiary, none of the installments would be includible in the decedent’s final income tax return. The estate must include in its income the two installments it received, and you as the beneficiary, must include the other two installments in your income when you receive them.