When is inheritance not taxed?

An annuity may be tax-deferred. Someone will have to pay taxes on the income portion of the investment.

There should be any tax liability

The amount being reported on the 1099 is not being reported for inheritance tax purposes, but for income tax purposes. California no longer has an inheritance tax and the federal death tax is an estate tax determined by the value of the decedent's estate. During this year, a decedent can leave up to $5,000,000 taxable estate on death without owing any estate tax (assuming the decedent didn't make any taxable gifts during the decedent's lifetime). I am assuming that your mother's estate did not exceed that amount, so that there was no estate tax on the annuity funds you received. If you as a beneficiary receive property from an estate on which income tax had never been paid, such as a distribution from an IRA, 401k or other tax deferred investments such as an annuity, you will be subject to income tax on all or part of the amount distributed to you. In the case of an annuity, if only part of the distribution is being reported to the IRS as income on a 1099, then your mother invested after-tax funds in that annuity. The rest of the distribution which isn't being reported is return of your mother's investment in the annuity or what was remaining of the investment at her death if she had taken distributions from the annuity during her lifetime. If there were distributions made to your mother during her lifetime, such distributions would have also been part income and part return of her investment, thereby reducing the investment amount remaining at her death. The 1099-R should report the total distribution to you, not just part of the distribution, in box 1 and only the amount subject to income tax in box 2a (which appears to be $8000 in your case). However, if box 2a is left blank and the box taxable amount is not determined is checked in 2b, the taxable amount will need to be determined. In either case, you should review the annuity contract, account statements and 1099-R to make sure that the correct of amount of taxable income is being to you. If the annuity had been purchased with before tax dollars, say as part of the assets purchased in an IRA, then the total distribution would have been subject to income tax.

It is probably income tax, not inheritance tax.