Does the U.S. tax restitution payments?

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Q. My spouse may inherit some money in name of restitution in Serbia. The money will be as compensation for a property taken from her grandparents during World War II. Will that money be subject to federal and state taxes? We have been living in the U.S. since 1980 and we are U.S. citizens.
— Confused

A. Here are the basics when it comes to restitution, specifically based on Serbian law and U.S. tax law.

The Agency for Restitution of the Republic of Serbia accepted claims related to property confiscated by communist authorities after World War II from March 2012 to March 2014, said Daryna Chumak of Wilkin & Guttenplan in East Brunswick.

The law allows for the return of properties to former owners or their descendants either in-kind or, in cases where in-kind return is not possible, financial restitution. Financial restitution will take the form of bonds, up to a maximum of 500,000 euros (approximately $650,000) to any individual claimant, with terms ranging from 10 to 15 years depending on the age of the claimant.

Restitution payments are not subject to federal income tax, but four states tax such payments: Alabama, Arkansas, Mississippi and Pennsylvania, Chumak found.

Please be sure to work with a tax advisor familiar with the law to make sure any money received is not taxable.

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