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<<My Grandmother recently passed away, we were just informed that her 4 grandchildren of which I am one, have inherited her IRA.>>

First, sorry to hear of the passing of your Grandmother. My condolonces.

Second, you'll really want to go to the Taxes FAQ area and read my series regarding non-spousal beneficiaries of an IRA. It'll lay out some options that you have in order to minimize your current taxes with respect to the receipt of these IRA funds. It's really required reading for you.

<< Our questions:
Since she left the money to her grandchildren (my mother is deceased) do we have to worry about generation skipping tax?>>

Grandma's ESTATE may have to worry about the GST tax. But unless the amounts are substantial, it's likely that there will be no GST issues. But, again, this issue is at the ESTATE level...not necessarily at the beneficiary level. So this question should be directed at the attorney who is dealing with the estate and estate tax issues.

<<She lived in Pennsylvania; each grandchild resides in a different state; one lives in Washington State, one in Florida, one in Ohio and one in Pennsylvania, if we take distribution of these funds, what taxes will we have to pay (the amount is not extremely large)?>>

It'll be treated as ordinary income to you and will be taxed at your marginal tax rate...whatever that rate happens to be. It could be different for all of you. And while I'm not familar with Penn state laws, you would generally not be taxed in Penn for taxes on the IRA distribution, unless Penn is your resident state.

<<If my grandmother had debts at the time of her death, will we be responsible for those debits if we choose to claim the funds?>>

That's a complicated issue and will require a legal interpretation from a pro in the state where she resided.

<<If the IRA was funded by yearly or monthly contributions would the entire amount we receive be taxable to us (assuming we have to pay taxes on the money); or, would only the interest earned be taxable since my Grandmother would have put the money into the IRA on an after-tax basis from her Gross Income?>>

If Grandma made non-deductible contributions during her lifetime, then she has "basis" in the IRA. That basis will transfer to you, and not all of the IRA will be taxable to you. If Granny made non-deductible contributions during her lifetime, they should be supported by Form 8606 which should have been attached to her tax returns in the years of the non-deductible contributions. So if you can get your hands on those tax returns, you might save yourself some tax bucks.

But, barring the proof that Granny had "basis" in her IRA, all of the distributions to you would be taxable in full.

Hope this helps...
TMF Taxes
Roy
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