Bequests are not taxable income under federal law. When you inherit cash, stock, real estate, or other property through a will or trust, the value of what you receive is excluded from your gross income and does not go on your tax return.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances A $200,000 cash bequest from a grandparent, a house left to you by a parent, or shares of stock passed through a trust all arrive tax-free at the moment of transfer. The complications people run into come later, and mostly from one category of asset.
Income the Property Earns After You Inherit It
The exclusion covers the asset itself, not what it produces afterward. Dividends on inherited stock, rent from an inherited property, and interest on inherited bank accounts are ordinary taxable income to you starting the day after the original owner dies.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances If you inherit a rental duplex, the bequest is tax-free but the rent checks you collect from that point on are fully taxable. Same principle for a brokerage account: the shares transfer without income tax, but every dividend paid afterward belongs on your return.
Selling Inherited Property: The Stepped-Up Basis
Selling an inherited asset can create a capital gain, but usually a much smaller one than you might expect. Your cost basis in inherited property is the fair market value on the date the previous owner died, not what they originally paid.2Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This is the stepped-up basis rule.
Say the decedent bought stock decades ago for $50,000 and it was worth $300,000 the day they died. Your basis is $300,000. Sell right away at that price and you owe no capital gains tax. Had that same stock been gifted to you during the owner’s lifetime instead, you would have taken their $50,000 basis and faced a $250,000 gain. The step-up wipes out a lifetime of appreciation for tax purposes.
If the estate is large enough to file a federal estate tax return, the executor can elect an alternative valuation date six months after death, but only when doing so lowers both the estate value and the estate tax owed.3Internal Revenue Service. Gifts and Inheritances The rule also runs the other way. If an asset lost value during the owner’s life, your basis steps down to the lower date-of-death value, and you cannot claim a loss measured from what the decedent originally paid.
Because a sale years later still depends on this number, hang onto documentation of the date-of-death value. A brokerage statement showing closing prices works for publicly traded securities. A dated appraisal is the safer choice for real estate you plan to hold rather than sell quickly.
The Real Exception: Inherited Retirement Accounts
The most common way an inheritance produces a real income tax bill is through pre-tax retirement accounts, primarily Traditional IRAs and 401(k)s. These accounts contain what the tax code calls income in respect of a decedent: money the owner earned or deferred but never paid tax on.4Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents The deferred tax bill does not disappear at death. It passes to whoever inherits the account.
Every dollar you withdraw from an inherited Traditional IRA or 401(k) is ordinary income taxed at your marginal rate.5Internal Revenue Service. Retirement Topics – Beneficiary There is no stepped-up basis inside these accounts. Inherit a $500,000 Traditional IRA and you have inherited $500,000 of future taxable income. The custodian will report distributions to you on Form 1099-R.
Unpaid wages owed to the decedent, certain partnership income, and accrued interest on U.S. savings bonds work the same way. All of it carries a tax bill that follows the money.6Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators
The 10-Year Rule
If the account owner died in 2020 or later and you are not the surviving spouse, you almost certainly have to empty the account by the end of the tenth year after the year of death.5Internal Revenue Service. Retirement Topics – Beneficiary If the original owner had already started required minimum distributions, you may also need to take annual distributions in years one through nine.
How you spread those withdrawals matters. Pulling the whole balance in a single year can push you into the top federal bracket. Spacing distributions across the decade keeps taxable income lower each year. This is the biggest planning decision most beneficiaries face, and most don’t think about it until the deadline is close.
A narrow group of eligible designated beneficiaries can still stretch withdrawals over their own life expectancy: surviving spouses, minor children of the account owner, disabled individuals, and beneficiaries not more than ten years younger than the decedent.5Internal Revenue Service. Retirement Topics – Beneficiary
Inherited Roth IRAs
An inherited Roth IRA is a much better tax outcome. Withdrawals of contributions are always tax-free, and withdrawals of earnings are tax-free as long as the account has been open at least five years.5Internal Revenue Service. Retirement Topics – Beneficiary Most inherited Roths easily meet the five-year test because the clock started when the owner first funded any Roth. Non-spouse beneficiaries are still subject to the 10-year rule, but emptying an inherited Roth within that window usually produces no income tax at all.
Life Insurance
Life insurance death benefits paid to a named beneficiary are not gross income to you.7Internal Revenue Service. Life Insurance and Disability Insurance Proceeds A $500,000 payout is not reported as income. Any interest that accrues on the proceeds between the date of death and the date you actually receive them is taxable and does get reported.
There is a narrow exception. If the policy was transferred to the beneficiary for value before the insured died, the tax-free treatment is limited to what the beneficiary paid for the policy plus any premiums they paid afterward.7Internal Revenue Service. Life Insurance and Disability Insurance Proceeds This “transfer for value” rule shows up most often between business partners, not in typical family situations.
Estate Tax and State Inheritance Tax
Federal estate tax is a separate tax on the total value of everything the decedent owned. The estate pays it before assets are distributed, so beneficiaries are not personally billed. For 2026 the basic exclusion is $15 million per individual, set by the One, Big, Beautiful Bill Act signed into law in July 2025.8Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax Married couples can effectively shield up to $30 million using portability, and only value above the exemption is taxed, at a top rate of 40%.9Internal Revenue Service. Whats New Estate and Gift Tax At these levels the federal estate tax reaches a small fraction of families. When it does apply, it is the estate’s problem to pay, not yours; you receive your bequest after the tax is settled.
States are where more beneficiaries actually get hit. About a dozen states and the District of Columbia have their own estate taxes, some with exemptions as low as $1 million. Those also work as estate-level obligations paid before distribution.
Five states go further with a true inheritance tax paid by the recipient based on what they personally received. The rate and whether you owe anything depend on your relationship to the decedent. Spouses are typically exempt. Children and grandchildren are often exempt or taxed at very low rates. Siblings, more distant relatives, and unrelated beneficiaries pay higher graduated rates. Iowa, which used to have one, eliminated its inheritance tax as of 2025. Check the Department of Revenue in the decedent’s state and in your own state for filing requirements and deadlines.
Bequests From Someone Outside the United States
A bequest from a nonresident alien or foreign estate is still excluded from your income under the same rules. But there is a reporting trap. If you receive more than $100,000 from a foreign individual or estate in a single tax year, you must report it on Form 3520.10Internal Revenue Service. Gifts From Foreign Person
The penalty for missing that filing is 5% of the value per month, up to 25%.10Internal Revenue Service. Gifts From Foreign Person On a $400,000 foreign inheritance, that caps at $100,000 in penalties on money that was never taxable in the first place. Reasonable cause is the only defense. File Form 3520 with your return for the year you receive it.
Refusing a Bequest
Accepting an inheritance is not mandatory. If the money would push you into a higher tax bracket, interfere with means-tested benefits, or land in a place you would rather see it skip, federal law lets you refuse it through a qualified disclaimer. Done correctly, the IRS treats the property as though it never came to you; it passes to whoever is next in line under the will or trust, and it is not treated as a gift from you.
The disclaimer has to meet all of the following requirements:11eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer
- In writing, signed, and irrevocable, identifying the property being refused.
- Delivered to the executor, trustee, or person holding legal title no later than nine months after the date of death.
- Made before you have accepted the property or any of its benefits. Cashing a dividend check or collecting rent ends the option.
- Made without directing where the property goes next; it must pass on its own under the governing document.
The nine-month deadline is firm. Beneficiaries under 21 have until nine months after their 21st birthday. Miss it, and any later transfer of the property is treated as a gift from you, with potential gift tax consequences.