Q&A: Estate, beneficiary taxes
Readers get help with beneficiary taxes, misspellings on W-2 forms.
March 6, 2002: 11:20 a.m. ET
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NEW YORK (CNN/Money) - You can change the spelling of your name on your W-2 form when you file you taxes. Life insurance money received as a beneficiary is not taxable, but some annuities and IRAs may be taxed.
These are among the answers to reader's questions this week in our latest Q&A. Check back to our Tax Center page every Wednesday from now until the filing deadline, on April 15, for more.
This week's answers come from Tony Bardi of the National Association of Enrolled Agents.
-- I have three different W-2s because I had three different jobs. Two of them have my name spelled incorrectly -- it's off by a couple of letters. Can I make the change on the W-2 form itself, instead of requesting a new W-2 form?
Bardi: You can make the changes on the Form W-2 itself, but nobody at the IRS will probably notice. If you file electronically the tax software will probably ask you to input for each W-2 the information exactly as it is on the form including your name. That will alert the IRS to the changes, but the only really important thing is your Social Security number. If that is correct on all three W-2s go ahead and file your tax return without any worries.
-- My husband was forced to sell his company stock when his company was bought out. He received a check and did reinvest it. Do we need to claim all the money or do we just claim what was a gain minus the price of the shares. I have been given several different answers. He had 114.5906 shares of EGR. He had this stock for 3 years. He paid from $15 to $25 a share. We are so confused. He received a check for $4,612.47. Please help. -- Amy
Bardi: To determine the gain on the sale of stock, you add up the cost of all of the shares you purchased. So if you bought 30 shares at $15 ($450), 50 shares at $20 ($1,000), and 35 shares at $25 ($875) you would have a total cost of $2,325. That cost basis is subtracted from the selling price minus commissions to arrive at your gain. Since the stock was held for three years it would be taxed at the long-term capital gains rate of either 10 or 20 percent, depending on your regular tax bracket.
-- I inherited a small amount: $45,000. It was divided between an IRA and life insurance. My question is: Do I have to claim this money as income as it doesn't go over the $675,000 limit. -- Jackie Brooks
Bardi: The $675,000 limit is for paying an estate tax, not for income tax purposes. If you receive life insurance proceeds as a beneficiary the amount you receive is not taxable income. If you receive the proceeds of an IRA as a beneficiary and the IRA was a Traditional or Rollover IRA, the funds you received are fully taxable to you because no one has ever paid tax on them.
-- I am a 60-year-old widow on disability retirement. Because of this I have been able to contribute to my IRA every year since taking disability. Am I also included in the extra $1,500 that people 50 and over are able to contribute in 2002? -- Jean Decker, Wilmington, Il.
Bardi: I'm not sure how receiving a disability retirement qualifies you for making IRA contributions that are based on earned income. However, assuming you do qualify to make IRA contributions, the rules for 2002 state that the limit is $3,000 for everyone and individuals 50 and older are able to contribute an additional $500 making their total contribution $3,500.
-- Hello. My mother recently died and left an estate worth about a quarter of a million dollars to be split 5 ways amongst her children. None of us has ever received anything from an estate, or from gifts before. I have been doing some reading and it seems that there would be no tax associated with this distribution? Is that correct? There is an annuity in the estate she set up for us. The paper said the taxable amount is $11,500 and the rest is principal $45,000. Will this be taxable to us or will it fall under the estate and pass through to us tax free? Thank you. -- unnamed
Bardi: Because the size of the estate is below $675,000 no estate tax needs to be paid. However, beneficiaries who receive proceeds from annuities and IRAs will need to pay some income tax. The $11,500 taxable amount represents the earnings of the annuity after your mother set it up. Those earnings have never been taxed, therefore they are taxed when distributed either to the owner, or in your case, the beneficiaries. 
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