Inheritance is not taxable income under federal law. Section 102 of the Internal Revenue Code excludes the value of property you acquire by bequest, devise, or inheritance from your gross income, whether that property is cash, a house, stocks, a car, or anything else.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances If you inherit a $50,000 bank account, that $50,000 does not go on your tax return as income. The complications start when the inherited property earns money, when you sell it, or when it falls into one of a few specific categories the tax code treats differently.
Income the Inherited Property Earns After You Own It
The exclusion covers the asset itself, not what it produces once it’s yours. Section 102(b) is explicit that income from inherited property is not shielded from tax.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances Inherit a rental house, and the rent you collect is ordinary income on Schedule E of your Form 1040.2Internal Revenue Service. Topic No. 414, Rental Income and Expenses Inherit stocks, and dividends paid after the date of death show up on a Form 1099-DIV and are taxable to you.3Internal Revenue Service. Instructions for Form 1099-DIV Interest on inherited bonds works the same way through a Form 1099-INT.
Life insurance is a separate category and generally cuts the other way. Proceeds paid to you as a beneficiary because of the insured person’s death are excluded from gross income under Section 101.4Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits The exception: if the insurer holds the money and pays you interest on it, that interest is taxable.5Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
If the inheritance comes to you through a trust, income distributed to you keeps its original character. Interest stays interest, dividends stay dividends, and capital gains stay capital gains. The trust sends you a Schedule K-1 (Form 1041), and you report the amounts on your own return in the same way.6IRS.gov. 2025 Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR Principal distributions representing the original inherited property generally are not taxable income to you.
Selling Something You Inherited
When you sell an inherited asset, you owe capital gains tax only on appreciation that happened after the original owner died. Under Section 1014, your basis is stepped up to the fair market value on the date of death.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Decades of growth during the decedent’s lifetime are effectively erased for your tax purposes.
Suppose the original owner bought a stock at $20 per share. On the date of death it was worth $100. Your basis is $100. If you sell a year later at $110, you report a $10 per-share gain on Schedule D and Form 8949. Sell at $100 or less and you owe nothing. The same stepped-up basis applies to real estate, business interests, and most other inherited assets.
If the estate had to file Form 706, the executor is required to send you a Schedule A from Form 8971 listing each asset and its reported value, and your basis cannot exceed that figure.8IRS.gov. Instructions for Form 8971 and Schedule A Hold onto it. For real estate, get a professional appraisal as of the date of death, because the IRS can challenge your claimed basis years later when the sale happens.
Inherited Retirement Accounts
Traditional IRAs and 401(k)s are the biggest exception to the “inheritance isn’t income” rule. The original owner funded them with pre-tax money, so no one has paid income tax on it yet. Distributions you take from an inherited traditional IRA or 401(k) are ordinary income in the year you receive them.9Internal Revenue Service. Retirement Topics – Beneficiary
The 10-Year Rule
For most non-spouse beneficiaries of owners who died in 2020 or later, the SECURE Act requires the account to be fully emptied by the end of the 10th year following the year of death.9Internal Revenue Service. Retirement Topics – Beneficiary That can push a large amount of taxable income into a short window.
Whether you also owe annual withdrawals during years one through nine depends on timing. If the original owner had already begun required minimum distributions before death, you continue annual withdrawals and empty the balance by year ten. If the owner died before reaching that point, you only need the account drained by year ten, with no required annual amounts in between.
A few beneficiaries escape the 10-year rule entirely. These “eligible designated beneficiaries” include a surviving spouse, minor children of the account owner until they reach the age of majority, individuals who are disabled or chronically ill, and anyone not more than 10 years younger than the deceased owner.9Internal Revenue Service. Retirement Topics – Beneficiary They can stretch distributions over their own life expectancy.
Spousal Rollover
A surviving spouse has an option no one else has: roll the inherited account into your own IRA and treat it as always having been yours.9Internal Revenue Service. Retirement Topics – Beneficiary Required minimum distributions then follow your age. A younger spouse can defer taxes for years this way. Alternatively, keeping it as an inherited account lets you delay distributions until the year your deceased spouse would have turned 73, which can be useful depending on your current income.
Inherited Roth IRAs
Inherited Roths follow the same 10-year distribution timeline for most non-spouse beneficiaries, but qualified withdrawals are tax-free because the original contributions were already taxed. One wrinkle: if the Roth is less than five years old when you withdraw earnings, those earnings can be taxable.9Internal Revenue Service. Retirement Topics – Beneficiary Contributions always come out tax-free regardless of account age.
Income the Deceased Earned but Never Collected
Some payments you receive from an estate represent money the deceased had earned but not yet received. The tax code calls this income in respect of a decedent, and it is fully taxable to whoever gets it. Common examples: unpaid wages or bonuses, sales commissions earned before death but paid afterward, and accrued interest that hadn’t been reported. These items get no stepped-up basis. They carry the same tax treatment they would have had if the original owner had lived to collect them.10Legal Information Institute (LII) / Cornell Law School. Income in Respect of Decedent If your parent earned a $15,000 commission paid to you after their death, that $15,000 is ordinary income on your return.
Series EE and Series I savings bonds are a frequent trap in this category. Most bondholders defer reporting the accrued interest, sometimes for decades. When you inherit the bonds, all that deferred interest becomes taxable, either when you redeem them or when they mature.11TreasuryDirect. Tax Information for EE and I Bonds If the estate reported some of the interest before transferring the bonds to you, keep documentation so you aren’t taxed on the same interest twice.
When the estate was large enough to pay federal estate tax on these same items, Section 691(c) allows you an income tax deduction for the portion of estate tax attributable to the income you’re being taxed on.12eCFR. Deduction for Estate Tax Attributable to Income in Respect of a Decedent The math isn’t simple, but the deduction can be substantial when it applies, and it’s worth bringing to a tax professional.
Inheritances From Someone Abroad
Property you inherit from a foreign person is still excluded from gross income under Section 102. But the IRS wants to know about it. If bequests or inheritances from a nonresident alien or foreign estate total more than $100,000 in a tax year, you must file Part IV of Form 3520 with your return, separately identifying each gift or bequest above $5,000.13Internal Revenue Service. Gifts From Foreign Person
Skipping the form is costly. The penalty is 5% of the unreported amount for each month you’re late, up to 25%.14Internal Revenue Service. International Information Reporting Penalties On a $500,000 inheritance, that caps at $125,000, for failing to file paperwork about money that wasn’t taxable in the first place.
Estate Tax and State Inheritance Tax Are Not Income Tax
People often blur three different taxes together. The federal estate tax is paid by the estate before anything reaches you. For 2026, estates below $15 million per individual owe none, and married couples can effectively double that through portability.15Internal Revenue Service. What’s New – Estate and Gift Tax Fewer than 1% of estates owe any federal estate tax at all.
Five states impose a separate inheritance tax that the beneficiary pays directly: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates run from 0% to 16% depending on the state and your relationship to the deceased. Surviving spouses are typically exempt, and children and close relatives usually face lower rates than distant relatives or unrelated beneficiaries. If the person who died lived in one of those states, check whether your share triggers a state tax, even though the federal government won’t tax the inheritance as income.
Estate tax shrinks the estate before distribution. Inheritance tax takes from your share after you receive it. Neither is income tax. Income tax on inherited assets only arises when you sell something above its stepped-up basis, collect income the property generates, or withdraw from a tax-deferred retirement account. For most beneficiaries, the inheritance itself produces no federal income tax bill.