In Dec 2011, I received most of an inheritance from my fathers estate. A small part was held back and paid in 2012. In 2012, I have gifted one adult child 10,000 of that and 7,000 to another adult child. How do I claim that on my taxes and how do my children file it and will it hurt my children to file this on their taxes? Also, can I claim any of the Attorney Fees or filing fees that were taken out of my inheritance for the processing of the estate?

ANSWER

The BIDaWIZ Team's Answer:

The money you inherit from your father's estate and the gifts to your two children are treated separately. The recipient of a gift never has to report income, only the donor MAY have to report the gift. The annual exclusion for reporting gifts is $13,000 per person for 2012. Therefore, you would not have to file a gift tax return. With regards to your question on the attorney fees associated with the estate. Generally speaking, those fees are deductible on the estate tax return if they are necessary to finalize your father's estate as per the Internal Revenue Code Section 2053. However, beneficiaries are allowed to claim a deduction for the excess or unused deductions on an estate. The beneficiary can only do this if the deductions are for the estate's last tax year. Was an estate tax return filed in 2011 or 2012? If you meet this requirement, you can claim the deduction of your pro-rata share of the expense by itemizing as a miscellaneous expense on your form 1040; subject to the 2% of adjusted gross income limitation.