(FORTUNE Magazine) – One thing is clear from the last-minute tax-preparation questions I've received: Aging baby-boomers are starting to come into inheritances--big and small--and, having barely mastered the realm of 1040s and W-2s, are now being thrust into an even more complex world, the parallel universe of estate- and gift-tax law. This is foreign territory for most, complete with its own rules, tax forms, and traps for the unwary.

In 1998 my wife received $5,000 [cash] from her grandmother's [estate]. Is this income we need to claim when filing our 1998 taxes? What category would it come under? How should we claim it? DOUG HARRELL Phoenix

I am happy to report that this is one bit of income you won't have to pay taxes on. In general, inheritances are free money: No income tax is owed by the recipients. (This is different from the federal estate tax, which hits estates of over $650,000--$1.3 million for a couple--and is paid out of the estate.) This fact surprises a lot of people, probably because they are so used to paying tax on every morsel they make.

The big exceptions are inherited IRAs and company retirement accounts, such as 401(k)s, in which the decedent's pretax contributions have grown tax-deferred. Here, the income is taxable to you, the beneficiary, at your ordinary income tax rate as you take distributions. If the dearly departed's estate was large enough to be whacked by the federal estate tax, you can take an income tax deduction for any estate tax that was paid on these retirement accounts--and the deduction needn't exceed 2% of your income, as is the case with most miscellaneous itemized deductions. Many beneficiaries end up overpaying their taxes because they don't know about this deduction, says CPA Ed Slott, author of Your Tax Questions Answered.

Another exception: If money or property you inherit earns some income while the estate is being settled, that income must be reported either by you or by the estate. Usually the estate reports the income, but the estate executor might shift the tax burden to you if you have already received your share of the assets.

As beneficiary [of] an estate, closed in 1998, I'm due K-1 and 1041 info regarding income produced by the estate and my tax liability for same. I have not received this info from the estate attorney despite repeated requests. Is there anything in IRS regs to give me leverage in getting this info? JERRY GUTHRIE Daytona Beach Shores, Fla.

Estates file their tax returns on form 1041 (U.S. Income Tax Return for Estates and Trusts). Your share of the income is reported to you on schedule K-1 (Beneficiary's share of income, deductions, credits, etc.) of form 1041. Unfortunately for you, the estate executor doesn't have to provide you with the K-1 until the estate's tax return is due. When is that? you ask. If the estate is on a calendar year, its return is due April 15 (or July 15 if the executor gets an automatic extension, or Oct. 15 if the executor gets a second extension). That may force you to file an extension of your own. Alternatively, you can file your return, estimating the taxes you owe, and file an amended return later, after you get the K-1. If the income is likely to be "material," go for the extension, advises Arthur Andersen partner Stephen Corrick.

If the estate is on a fiscal year (estates are among the few entities that can be), the return--and therefore the K-1--is due 3 1/2 months after the close of the fiscal year. The executor can choose a fiscal year ending anywhere up to 12 months after the decedent died. Say your father passed away in July 1998, and the executor elected a fiscal year ending June 1999: The estate's return isn't due until October 1999, not including extensions. Thus, if you received any taxable income as part of your inheritance, you won't have to declare it until you file your tax return for 1999, in the year 2000--even if you actually had the income in hand in 1998. This is one reason executors choose fiscal years over calendar years: to allow beneficiaries to defer the taxes on their inheritances for an extended period.

If you don't get your K-1 on time, you can file form 8082 with your next tax return. Or contact your local IRS office. Uncle Sam can slap your executor with a fine of up to $100 or 10% of the amount required to be reported, whichever is greater. Reminding your executor about this penalty before the deadline passes might help dislodge the information.

Thanks to Al Beall of Peachtree City, Ga., who writes that my last column ("How to Get Out of an Annuity," March 29, in the fortune.com archive) "gives the impression that life insurance is not generally subject to estate taxes. Life insurance is always subject to estate taxes if the insured possesses any 'incidents of ownership' (right to obtain a policy loan, change beneficiary, assign to creditors of the insured, etc.) at the time of his/her death." For more on how to remove a life insurance policy from your estate, see "The Profits, and Perils, of Life Insurance Trusts," Nov. 9, 1998, in the fortune.com archive.

Have a question or comment for Carolyn? E-mail her at moneymanager@fortunemail.com.