Inherited money is not taxable income under federal law. When you receive cash, a house, stocks, or personal property through a will or by operation of law, the value of what you receive is excluded from your gross income and you do not report it on your tax return.1GovInfo. 26 U.S. Code 102 – Gifts and Inheritances The exceptions are narrow but important: tax-deferred retirement accounts, income the asset earns after it becomes yours, and a few states that tax the beneficiary directly.
Why the Default Answer Is No
People often mix up two separate taxes. The federal estate tax, if any applies, is paid by the deceased person’s estate before anything reaches heirs. Income tax is paid by living people on what they earn. An inheritance is a transfer of wealth, not earnings, so it sits outside the definition of gross income entirely.2Internal Revenue Service. Gifts and Inheritances
Inherit a bank account holding $200,000, and that $200,000 is not taxable income. Inherit a house, a brokerage account, or a car, and the receipt itself creates no federal income tax liability. The exclusion covers the property as it stood on the date of death. It does not cover what that property earns afterward, and it does not cover accounts where the money inside was never taxed in the first place.1GovInfo. 26 U.S. Code 102 – Gifts and Inheritances
Inherited Retirement Accounts Are the Main Exception
Inheriting a Traditional IRA or 401(k) is where most heirs actually owe tax. The money in these accounts went in pre-tax, so every dollar you withdraw comes out as ordinary income at your marginal rate, which can reach 37% for 2026.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A large inherited IRA can push you into a higher bracket for years if the timing of withdrawals is wrong.
How fast you have to drain the account depends on your relationship to the person who died.
Surviving Spouses
A surviving spouse has the most flexibility. You can roll the inherited account into your own IRA and treat it as if you had always owned it, delaying required withdrawals until you reach your own required minimum distribution age. You can also keep it as an inherited IRA and take distributions based on your own life expectancy.4Internal Revenue Service. Retirement Topics – Beneficiary For a younger spouse, the rollover usually wins because it buys the most years of tax-deferred growth.
The 10-Year Rule for Most Other Beneficiaries
Most non-spouse beneficiaries, including adult children, grandchildren, and siblings, must empty the inherited account by the end of the tenth year after the original owner’s death.4Internal Revenue Service. Retirement Topics – Beneficiary This rule came from the SECURE Act of 2019 and replaced the older stretch-IRA approach that let beneficiaries spread withdrawals across their own lifetime.
Whether you also owe annual withdrawals during those ten years depends on when the owner died relative to their required beginning date for distributions. If the owner died before that date, you can skip years one through nine as long as the account is empty by year ten. If the owner died after that date, you must take a minimum distribution each of the first nine years and clear whatever remains in year ten.4Internal Revenue Service. Retirement Topics – Beneficiary Missing a required annual distribution triggers a 25% excise tax on the shortfall, reduced to 10% if you correct it within two years.5Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
From a tax standpoint, waiting until year ten and taking the whole balance as a lump sum is usually the worst option, because it stuffs the entire account into one tax year. Spreading withdrawals across the full window, or loading them into years when your other income is low, keeps more of the money out of the top brackets.
Eligible Designated Beneficiaries
A narrow group can still stretch distributions across their own life expectancy rather than following the 10-year rule. Eligible designated beneficiaries include disabled or chronically ill individuals, individuals not more than ten years younger than the account owner, and the deceased’s minor children, though a new 10-year clock starts for a minor child at age 21. An eligible designated beneficiary can also elect the standard 10-year rule if that fits better.4Internal Revenue Service. Retirement Topics – Beneficiary
Inherited Roth IRAs
Inherited Roth IRAs follow the same withdrawal timing rules as inherited Traditional IRAs. The difference is that Roth distributions are generally tax-free because the original contributions were made with after-tax dollars.4Internal Revenue Service. Retirement Topics – Beneficiary One caveat: if the Roth was less than five years old when the owner died, the earnings portion of a withdrawal may be subject to income tax until the five-year holding period is met. Original contributions still come out tax-free.
Income the Inherited Asset Earns Afterward
The exclusion covers the inheritance itself, not what it produces later. Dividends on inherited stock, rent from an inherited rental property, and interest on an inherited bank account are ordinary income once the asset is yours, and you report them like any other investment income.
Between the date of death and the date assets are actually distributed, the estate may earn income on those assets. The estate files Form 1041. If it passes that income through to you rather than paying tax at the estate level, you’ll receive a Schedule K-1 showing your share, which you report on your personal return using the figures on the K-1.6Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR Keep the K-1 for your records; don’t attach it to your return unless it shows backup withholding.
Stepped-Up Basis When You Sell Inherited Property
If you sell inherited stocks, mutual funds, or real estate, your cost basis is the fair market value on the date of the owner’s death, not what the owner originally paid.7Internal Revenue Service. Publication 551, Basis of Assets This stepped-up basis is one of the most valuable features of the tax treatment of inheritances.
Say a parent bought stock decades ago for $20,000, and it was worth $300,000 on the day they died. Your basis is $300,000. Sell it immediately at that price and you owe no capital gains tax. Hold it and sell later for $340,000 and you owe capital gains tax only on the $40,000 of post-death appreciation. All the gain that built up during the parent’s lifetime is wiped away for tax purposes. Inherited assets also get long-term capital gains treatment automatically regardless of how briefly you hold them, keeping the rate at 0%, 15%, or 20% depending on your income.2Internal Revenue Service. Gifts and Inheritances
In the nine community property states, the step-up applies to the entire value of community property when one spouse dies, including the surviving spouse’s half. A jointly owned stock position worth $500,000 with an original basis of $100,000 gives the surviving spouse a new basis of $500,000 in the whole holding.8Internal Revenue Service. Community Property
Life Insurance, Annuities, and Savings Bonds
Life insurance death benefits paid to a named beneficiary are generally not included in your gross income.9Internal Revenue Service. Life Insurance and Disability Insurance Proceeds A $500,000 term life payout is not taxable and does not need to be reported. If the insurer holds the proceeds and pays them with interest over time, only the interest piece is taxable.
Inherited annuities work the opposite way. For a non-qualified annuity, the earnings portion of each distribution is taxed as ordinary income; the original owner’s contributions come back tax-free.10Internal Revenue Service. Publication 575, Pension and Annuity Income On a lump-sum withdrawal, the IRS treats the earnings as coming out first, so the opening distributions are fully taxable until all gains have been pulled.
Series EE and Series I savings bonds carry accumulated interest the original owner typically deferred. Someone owes tax on that interest. If the estate reported it on the decedent’s final return, you only owe tax on interest earned after you took ownership. If the estate didn’t, you may receive a 1099-INT for the full accumulated interest when you cash the bonds, and you can adjust your return to exclude the portion that accrued before the previous owner’s death, with the burden of documentation on you.11TreasuryDirect. Tax Information for EE and I Bonds
State Inheritance Taxes
Federal law doesn’t tax you for receiving an inheritance, but five states do: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa’s inheritance tax was fully repealed effective January 1, 2025.12Justia Law. Iowa Code 450.98 – Tax Repealed
In every one of these states, surviving spouses pay nothing, and close relatives are either exempt or taxed at the lowest rate. The further your relationship from the deceased, the higher the rate. A few examples:
- Pennsylvania: direct descendants pay 4.5%, siblings pay 12%, and most other heirs pay 15%.
- New Jersey: siblings fall into a class that pays 11% to 16% on amounts above a $25,000 exemption; more distant relatives and unrelated heirs pay 15% to 16% above a $700 exemption.
- Kentucky: parents, children, grandchildren, and siblings are fully exempt. Nieces and nephews pay 4% to 16% above a $1,000 exemption. Unrelated heirs pay 6% to 16% above a $500 exemption.
- Nebraska: close family members receive a $100,000 exemption and pay 1% above that.
The state that matters is the one where the deceased lived, not where you live. If your uncle resided in Pennsylvania and you live in Texas, Pennsylvania’s inheritance tax still applies to your share.
Foreign Inheritances Must Be Reported
If you receive more than $100,000 in a tax year as an inheritance from a non-U.S. person or a foreign estate, you must report it on Form 3520, even though the inheritance itself still isn’t taxable income.13Internal Revenue Service. Instructions for Form 3520 This is pure disclosure, no tax owed, but skipping it is costly. The penalty is the greater of $10,000 or 35% of the gross amount of the foreign bequest, with an added $10,000 every 30 days once the IRS has sent notice.14Internal Revenue Service. Failure to File Form 3520/3520-A Penalties On a $500,000 foreign inheritance, the initial penalty alone would be $175,000.
You Can Refuse an Inheritance
If accepting the money would push you into a much higher tax bracket, cost you government benefits, or make more sense passed down to the next generation, you can file a qualified disclaimer. The disclaimer must be in writing, delivered within nine months of the date of death (or within nine months of the beneficiary’s 21st birthday for a minor), and you cannot have accepted or benefited from the property first.15eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer
A qualified disclaimer is treated as if the transfer never happened. The property moves to the next person in line under the will or state law, and you are not treated as making a taxable gift. You cannot direct where the property goes; if you try, the disclaimer fails and you are back to owning the inheritance.