An inheritance is not itself reported anywhere on Form 1040. Federal law leaves the value of property acquired by bequest, devise, or inheritance out of gross income entirely.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances What you do report is the taxable activity that comes with certain inherited assets: distributions from tax-deferred retirement accounts, gains when you sell inherited property, income the deceased had earned but not yet received, and income the estate earned during administration and passed through to you. Each of those lands on a different line or schedule, and knowing where to report inheritance income on your 1040 comes down to matching the type of income to the right slot.
Quick Map of Where Each Type Goes
Before the detail, the short version:
- Inherited traditional IRA distributions: Form 1040, Lines 4a and 4b.
- Inherited 401(k) or other employer plan distributions: Form 1040, Lines 5a and 5b.
- Sale of inherited stock, real estate, or other capital assets: Form 8949, carried to Schedule D.
- Accrued wages the deceased was owed: Form 1040, Line 1.
- Accrued interest (including on inherited savings bonds): Schedule B, flowing to Line 2b.
- Installment sale payments the deceased was receiving: Form 6252.
- Income distributed to you by the estate: Schedule K-1 (Form 1041), then the lines shown below.
- Inherited annuity payments: Form 1040, Line 4b (taxable portion).
The cash, the house, the account balances themselves? Those don’t appear on the return. The size of the inheritance doesn’t matter for your income tax; a $500 bequest and a $5 million bequest are treated the same on your 1040. Federal estate tax, if any, is paid by the estate before assets are distributed and has no effect on your return.
Inherited Retirement Account Distributions
This is where most taxable inheritance income actually shows up. Money coming out of an inherited traditional IRA or 401(k) is ordinary income to you, because the original owner funded the account with pre-tax dollars.2Internal Revenue Service. Retirement Topics – Beneficiary
The custodian issues Form 1099-R showing the gross distribution and the taxable amount.3Internal Revenue Service. About Form 1099-R IRA distributions go on Form 1040, Line 4a (gross) and Line 4b (taxable). Distributions from employer plans like a 401(k) go on Lines 5a and 5b.4Internal Revenue Service. Instructions for Form 1040 – 2025
Inherited Roth IRA withdrawals are generally tax-free, because the original owner already paid income tax on the contributions. If the Roth was less than five years old at the time of death, withdrawals of earnings may be taxable.2Internal Revenue Service. Retirement Topics – Beneficiary Tax-free distributions still show on Lines 4a/4b, with Line 4b reflecting only the taxable portion (often zero).
The 10-Year Distribution Deadline
For deaths in 2020 or later, most non-spouse beneficiaries must fully distribute the inherited account by December 31 of the tenth year after the year of death.2Internal Revenue Service. Retirement Topics – Beneficiary If the original owner had already started required minimum distributions, IRS regulations require annual distributions in years one through nine as well. How you spread withdrawals across the window is largely up to you, and spreading them out often keeps you in lower brackets than a lump sum would.
A narrower group of eligible designated beneficiaries can stretch distributions over their own life expectancy instead: surviving spouses, minor children of the deceased, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased. Surviving spouses have an additional option to roll the account into their own IRA and treat it as their own.
Selling Inherited Property
Sales of inherited stock, real estate, or other capital assets go on Form 8949, with the totals carried to Schedule D.5Internal Revenue Service. Instructions for Form 8949 – 2025 IRS instructions direct you to enter “INHERITED” in the date-acquired column (column b) and to report the sale in Part II, the long-term section. Inherited property is automatically treated as long-term regardless of how long you actually held it, so even a sale the week after death qualifies for long-term capital gain rates.
Your basis in column (e) is the fair market value on the date of death, under the stepped-up basis rule.6Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If your father bought stock for $20,000 in 1995 and it was worth $200,000 the day he died, your basis is $200,000. Sell it for $205,000 and you owe capital gains tax only on $5,000. If the executor elected the alternative valuation date (six months after death), your basis reflects that value instead.7Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
A sale below your basis produces a capital loss that offsets other capital gains or up to $3,000 of ordinary income per year.
Watch the 1099-B
Brokerages frequently report inherited stock with a cost basis of zero or the original purchase price, because they don’t always have the date-of-death value on file. Enter the correct stepped-up basis on Form 8949 and check the box indicating that the basis reported on the 1099-B was incorrect. Skipping this step means paying tax on gains you don’t actually owe. Keep the appraisal or the date-of-death brokerage statement; the burden of proving basis is on you.8Internal Revenue Service. Gifts and Inheritances
Income the Deceased Earned But Had Not Received
Income in respect of a decedent (IRD) is money the deceased was entitled to but hadn’t collected before death: a final paycheck, deferred compensation, accrued interest and dividends, installment sale payments still coming in.9Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents IRD is fully taxable to whoever receives it, and it does not get a stepped-up basis.10eCFR. 26 CFR 1.691(a)-1 – Income in Respect of a Decedent
Where it goes depends on what kind of income it is. The item keeps the character it would have had for the deceased:
- Accrued wages: Form 1040, Line 1.
- Accrued interest: Schedule B, then Line 2b.
- Accrued dividends: Schedule B if applicable, then Line 3b (and Line 3a for the qualified portion).
- Installment sale payments: Form 6252.
Estate Income Passed Through on Schedule K-1
While an estate is being administered, its assets often keep earning: interest, dividends, rent. The estate files Form 1041 and sends each beneficiary a Schedule K-1 showing their share of income distributed during the year.11Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR
The K-1 boxes map directly to your 1040:
- Box 1 (Interest): Line 2b, and Schedule B if required.
- Box 2a (Ordinary dividends): Line 3b, and Schedule B if required.
- Box 2b (Qualified dividends): Line 3a.
- Boxes 3 and 4a (Capital gains): Schedule D, Line 5 for short-term, Line 12 for long-term.
- Box 5 (Other income): items like IRD, royalties, and annuity income not captured above.
A distribution of estate principal, as opposed to income the estate earned, is not taxable and doesn’t appear on the K-1. If a distribution to you exceeds the estate’s current-year income, the excess is a nontaxable return of principal.
Inherited Savings Bonds
Series EE and Series I bonds accumulate interest that stays tax-deferred until the bond is redeemed or matures.12TreasuryDirect. Tax Information for EE and I Bonds When you cash an inherited bond, all of the previously untaxed accumulated interest is ordinary income to you. You report the interest on Schedule B if your total interest exceeds $1,500, and the total flows to Line 2b.13Internal Revenue Service. Instructions for Schedule B (Form 1040)
The person filing the decedent’s final return can elect to include interest earned through the date of death on that return. If that election is made, you owe tax only on interest earned after the date of death. If it isn’t made, you owe tax on the full accumulated amount when you cash the bond.
Inherited Annuities
Non-qualified annuities were funded with after-tax dollars, so the principal isn’t taxed again, but the earnings portion is ordinary income and doesn’t get a stepped-up basis. The issuer sends Form 1099-R showing the taxable amount, which goes on Line 4b of your 1040. A lump-sum distribution puts all of the earnings into one tax year; periodic payments split each check between tax-free principal and taxable earnings.
Life Insurance: Usually Not on the Return
Life insurance death benefits paid to a named beneficiary are not taxable and don’t go on your 1040.14Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits The exception is interest. If the insurer holds the proceeds for a period before paying, the accumulated interest is taxable. You’ll get a Form 1099-INT for that interest, which goes on Schedule B and flows to Line 2b.15Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
State Inheritance Tax
A handful of states impose a separate inheritance tax paid by the beneficiary. Rates and exemptions depend on the state and often on your relationship to the deceased. These are reported on state forms, not on your federal 1040, but they can still be a meaningful cost worth checking for the state where the deceased lived.