Bequests are generally not taxable to beneficiaries under federal law. Money or property you receive through someone’s will is excluded from gross income, so you don’t report the inheritance itself on your tax return.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances The exceptions are what catch people: inherited retirement accounts, income the inherited property produces after you own it, and gains when you eventually sell. A handful of states also tax the beneficiary directly.
The Bequest Itself Is Not Income
Federal tax law treats an inheritance as a transfer of existing wealth, not new income to you. Whether you receive $5,000 or $5 million in cash, real estate, stocks, or other property under a will, the amount is not subject to federal income tax when it reaches you.2Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators There’s no line on Form 1040 for “bequest received,” and no requirement to notify the IRS that you inherited anything.
Life insurance proceeds paid to you because of someone’s death follow the same rule. The death benefit itself is excluded from your gross income.3Internal Revenue Service. Life Insurance and Disability Insurance Proceeds If the insurer held the money for a period and paid you interest on top of the benefit, that interest portion is taxable.
Income the Inherited Property Produces
The exclusion covers the inheritance. It does not cover what the inherited property earns after you own it. Federal law is explicit that income from inherited property does not qualify for the exclusion.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances
Dividends from inherited stock, interest from inherited bank accounts or bonds, and rent from inherited real estate all go on your return for the year you receive them. If the estate itself earns income during administration and passes it through to you, you’ll get a Schedule K-1 from the estate’s Form 1041 filing and report your share on your personal return.
Inherited Retirement Accounts
This is where beneficiaries most often get surprised. Money in a traditional IRA, 401(k), or similar tax-deferred account has never been taxed. The original owner deducted the contribution, and the balance grew tax-free. That deferred tax doesn’t disappear at death. When you take distributions as a beneficiary, you owe ordinary income tax on them.2Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators
This category is called “income in respect of a decedent.” Whoever receives it must include it in gross income for the year of the distribution.4Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents Retirement accounts are the common example, but the same treatment applies to the deceased person’s unpaid wages, accrued bond interest, and other earnings they had a right to but hadn’t yet collected.
The 10-Year Rule
If you inherit a retirement account from someone who died after 2019 and you are not a surviving spouse, minor child, disabled or chronically ill person, or someone within ten years of the deceased’s age, you must empty the account within ten years of the owner’s death.5Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs You can spread withdrawals across that window however you like, but the balance must reach zero by the end of year ten.
If the original owner had already reached their required beginning date for minimum distributions, you also have to take annual withdrawals during the ten-year period, not just drain the account at the end. Because every dollar from a traditional account is ordinary income to you, timing matters. Pulling the full balance in a single year can push you into a much higher bracket than spreading it out.
Inherited Roth IRAs
Roth IRAs follow the same ten-year distribution timeline for most non-spouse beneficiaries, but contributions went in after tax. Qualified distributions from an inherited Roth are generally tax-free as long as the account has been open for at least five years. The clock still runs; the tax bill doesn’t.
Selling Inherited Property
Inheriting an asset isn’t a taxable event. Selling it later can be. If you sell inherited stock, real estate, or other property for more than it was worth when you received it, you may owe capital gains tax. The tax code gives inherited property two meaningful advantages here.
First, the basis resets. When you inherit property, its tax basis becomes the fair market value on the date the owner died. This is the stepped-up basis.6Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The original purchase price no longer matters. If your parent bought stock for $50,000 decades ago and it was worth $400,000 the day they died, your basis is $400,000. Sell it a month later for $405,000 and only the $5,000 gain is taxed. Years of built-up appreciation are effectively wiped out.
Second, the holding period is automatic. Normally you have to hold an asset more than a year before a sale qualifies for the lower long-term capital gains rate. Inherited property is treated as long-term no matter how briefly you held it.7Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property Even a sale the week after you receive the asset qualifies for long-term rates, which top out at 20 percent for most taxpayers.
Basis Reported by the Executor
For estates large enough to require a federal estate tax return, the executor must also file Form 8971 and give you a Schedule A showing the value of the property you inherited. You cannot claim a basis higher than the value the executor reported on that schedule.8Internal Revenue Service. Instructions for Form 8971 and Schedule A Hold on to that document. If the estate was large enough to require one and you never received it, ask the executor before selling anything.
Federal Estate Tax Is Paid by the Estate
The federal estate tax comes out of the estate before assets are distributed to beneficiaries. You don’t pay it personally. For 2026, the exemption is $15 million per individual, and only the value above that threshold is taxed, at rates up to 40 percent.9Internal Revenue Service. Whats New – Estate and Gift Tax The great majority of estates fall below that line and owe nothing. The executor handles any calculation and payment on Form 706.10Internal Revenue Service. Instructions for Form 706 If the estate does owe tax, your bequest may be smaller than expected, but the tax was paid before anything reached you.
A married couple effectively shares the exemption. If one spouse dies without using their full amount, the survivor can claim what’s left, potentially sheltering up to $30 million. This is called portability. It is not automatic: the deceased spouse’s executor must file Form 706 to elect it, even when the estate is small enough that no tax is owed.11Internal Revenue Service. Frequently Asked Questions on Estate Taxes Miss the filing and the unused exclusion is gone.
State Inheritance Taxes
Five states impose an inheritance tax that the beneficiary pays directly: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.12Tax Foundation. Estate and Inheritance Taxes by State, 2025 If the person who died lived in one of these states or owned property there, you may owe state-level tax even though the federal government doesn’t tax the inheritance itself.
Rates and exemptions in all five states depend on your relationship to the deceased. Surviving spouses are typically exempt. Children and grandchildren often get full or near-full exemptions. More distant relatives and unrelated beneficiaries face higher rates and smaller exemptions, with top marginal rates ranging from 10 percent to 16 percent. Maryland is the only state that imposes both an estate tax and an inheritance tax, so some estates there face two state-level layers.12Tax Foundation. Estate and Inheritance Taxes by State, 2025
Turning Down a Bequest
You are not required to accept an inheritance. If receiving it would create tax problems, push you into a higher bracket, or interfere with eligibility for government benefits, you can refuse it through a qualified disclaimer. Done properly, the IRS treats the property as though it never came to you, with no gift tax and no income tax consequences.
The rules are strict. The refusal must be written, signed, and delivered within nine months of the date of death.13eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer You cannot have already accepted the property or benefited from it, and you cannot direct where it goes next. It has to pass to whoever is next in line under the will or state law without your involvement. If you’ve deposited the cash, moved in, or collected rent, the window has effectively closed.
What Actually Goes on Your Return
The inheritance itself doesn’t appear on your Form 1040. What does appear is anything that flows from owning the inherited assets:
- Dividends, interest, and capital gains from inherited investments, reported the same as income from investments you bought yourself.
- Distributions from inherited traditional IRAs and 401(k)s, reported as ordinary income; the custodian sends a Form 1099-R.
- Income the estate earned during administration and passed through to you, shown on a Schedule K-1 from the estate’s Form 1041.
- Rent from an inherited rental property, reported on Schedule E.
Keep the paperwork the executor provides, especially the Schedule A from Form 8971 if you receive one. When you eventually sell inherited property, that documentation establishes your stepped-up basis and lets you calculate any gain correctly. The IRS matches reported sale prices against basis claims, and a wrong basis on your return is one of the quickest ways to draw a notice.