Money you receive as a beneficiary is generally not taxable income under federal law. Cash, stocks, real estate, and most other property passed to you by will, trust, or beneficiary designation are excluded from your gross income, so you do not report the value on your tax return when you receive it.1GovInfo. 26 USC 102 – Gifts and Inheritances The exceptions are where the real tax questions live. Inherited retirement accounts, savings bonds, annuities, and any income the inherited assets earn after death can all produce a tax bill. What you inherit matters far more than how much.
The General Rule and Its Limit
Federal law specifically excludes the value of property received by bequest, devise, or inheritance from your gross income.1GovInfo. 26 USC 102 – Gifts and Inheritances A check from a parent’s estate, shares from a grandparent’s brokerage account, or a house left to you in a will are not income for tax purposes.
The exclusion has a limit that catches people off guard. The inherited asset arrives tax-free, but whatever it earns after that does not. Dividends on inherited stock, rent from an inherited house, and interest on an inherited bank account are all taxable to you in the year you receive them, the same as any other investment income.
Inherited Retirement Accounts Are the Big Exception
Inherited traditional IRAs, 401(k)s, and other tax-deferred accounts hold money that was never taxed on the way in. Every dollar you withdraw comes out as ordinary income at your regular rate. This is where the general rule that inheritances are tax-free breaks down most completely, and it is the most common source of surprise tax bills for beneficiaries.
Traditional vs. Roth
Traditional accounts were funded with pre-tax dollars, so your distributions are fully taxable. Roth accounts were funded with after-tax dollars, so qualified distributions to you are generally tax-free. The Roth account must have been open at least five years before the original owner’s death for the earnings to come out tax-free. Either way, you still have to empty the account within the timeframe the tax code requires; the Roth just spares you the income tax on the withdrawals.
Spouses Have Options No One Else Gets
A surviving spouse can roll the inherited account into their own IRA and treat it as if it had always been theirs.2Internal Revenue Service. Retirement Topics – Beneficiary That delays required minimum distributions until the surviving spouse personally reaches the age when RMDs begin, currently 73.3Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs A surviving spouse can also keep the account as inherited and take distributions based on their own life expectancy.
The 10-Year Rule for Most Other Beneficiaries
If the account owner died after 2019, most non-spouse beneficiaries must empty the entire inherited account by December 31 of the tenth year after the year of death.2Internal Revenue Service. Retirement Topics – Beneficiary Within that decade you can take money out on any schedule you choose, but the balance has to reach zero by the deadline.
There is a wrinkle. If the original owner had already reached the age at which their own required minimum distributions were supposed to start, you must also take annual withdrawals during years one through nine, not just clear the account by year ten.4Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions Skipping those annual withdrawals triggers a 25% excise tax on the shortfall, dropping to 10% if you correct it within two years.3Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Beneficiaries Who Can Still Stretch Distributions
A narrow group can spread withdrawals across their own life expectancy instead of following the 10-year rule. These eligible designated beneficiaries include the surviving spouse, a minor child of the account owner (the 10-year clock starts once that child reaches the age of majority), disabled or chronically ill individuals, and any beneficiary not more than 10 years younger than the deceased owner.2Internal Revenue Service. Retirement Topics – Beneficiary Everyone else follows the 10-year rule.
Other Inherited Assets That Carry Tax
Savings Bonds
Series EE and I savings bonds accumulate interest over their life, and most owners defer reporting that interest until they cash the bond. When you inherit and later cash the bond, the IRS issues a Form 1099-INT covering all the interest the bond ever earned, including the years before you owned it.5TreasuryDirect. Tax Information for EE and I Bonds You can claim a reduction for interest already reported by the prior owner, but the burden of proving it falls on you. IRS Publication 550 covers the process.
Annuities
Inherited annuities do not get a stepped-up basis. If the original owner put $60,000 into a non-qualified annuity and it grew to $90,000, you owe income tax on the $30,000 in earnings as you take distributions. A lump-sum withdrawal pushes the entire taxable gain into one year and can move you into a higher bracket. Spreading withdrawals spreads the tax. Spousal beneficiaries can generally assume ownership and continue deferring taxes; non-spouse beneficiaries typically must withdraw the full balance within five or ten years, depending on the contract terms and whether the owner died before or after annuity payments began.
Income in Respect of a Decedent
The tax code has a name for what ties these situations together: income in respect of a decedent. This is income the deceased earned or was entitled to but had not received or reported before death.6eCFR. 26 CFR 1.691(a)-1 – Income in Respect of a Decedent Unpaid salary, accrued bond interest, retirement account balances, and deferred commissions all qualify. No income tax was paid on the money yet, so when it reaches you, you pick up the tax obligation the decedent never fulfilled. If the estate paid federal estate tax, you may be able to deduct the portion of estate tax attributable to the income in respect of a decedent you are now reporting, which prevents the same dollars from being fully hit twice.
Life Insurance Payouts
Death benefits from a life insurance policy are generally excluded from the beneficiary’s gross income.7Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits A $500,000 payout arrives tax-free whether the policy was term or whole life, and no matter how much the owner paid in premiums.
Two situations change the answer. If the policy was transferred to you in exchange for payment before the insured died, the transfer-for-value rule can limit the tax-free portion to what you paid plus premiums you covered afterward. And if you take the death benefit in installments rather than a lump sum, the interest the insurer pays on the unpaid balance is taxable to you, even though the underlying death benefit is not.
Selling Inherited Property: Stepped-Up Basis
When you sell an inherited asset, capital gains tax turns on the cost basis. For inherited property, the basis resets to the fair market value on the date of the original owner’s death rather than what the owner originally paid.8Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This is the stepped-up basis.
The effect is large. If your parent bought stock for $10,000 thirty years ago and it was worth $150,000 the day they died, your basis is $150,000. Sell for $152,000 the next month and you owe capital gains tax only on the $2,000 gain, not on the $140,000 of appreciation during your parent’s lifetime. If the estate files a federal estate tax return, the executor can alternatively elect a value from six months after the date of death.9Internal Revenue Service. Gifts and Inheritances
Income the Estate or Trust Earns Before Distributing to You
Between the date of death and the final distribution of assets, an estate or trust can accumulate income from dividends, interest, rents, and capital gains. That post-death income is taxable. Who pays depends on whether it flows out or stays in.
If the estate or trust distributes income to you during the tax year, you report it on your personal return and receive a Schedule K-1 breaking down your share by type of income.10Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 If the income stays inside the estate or trust, the entity pays tax by filing Form 1041.11Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts
The rate difference is worth knowing. Estates and trusts hit the top federal income tax bracket of 37% at just $16,000 of taxable income in 2026. A single individual does not reach that bracket until well over $600,000. Retaining income inside the entity rather than distributing it can significantly raise the total tax bill, which is worth a conversation with the executor or trustee.
Foreign Inheritances: A Reporting Trap
If you receive a bequest from a foreign estate or nonresident alien totaling more than $100,000 in a tax year, you must report it to the IRS on Form 3520, even though the inheritance itself may not be taxable income.12Internal Revenue Service. Instructions for Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts The form is informational; the penalty for skipping it is not. Failing to file triggers a penalty of 5% of the gift amount for each month the failure continues, up to 25% of the total.13Office of the Law Revision Counsel. 26 USC 6039F – Notice of Large Gifts Received From Foreign Persons On a $500,000 foreign inheritance, that is up to $125,000 in penalties for a form that costs nothing to file.
Estate and Inheritance Taxes Are Separate From Income Tax
A different category of taxes applies to the transfer of wealth itself. These are usually paid by the estate before you receive anything, so they are not income tax on you as a beneficiary, but they can reduce what reaches you.
The federal estate tax is paid by the estate on Form 706.14Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return The federal exemption for 2026 is $15,000,000 per individual, following an increase enacted under the One, Big, Beautiful Bill signed into law on July 4, 2025.15Internal Revenue Service. What’s New – Estate and Gift Tax Estates below that owe no federal estate tax. Thirteen states and the District of Columbia impose their own estate taxes with much lower thresholds, so an estate that owes nothing federally can still face a state bill.
Five states impose an inheritance tax, which is levied directly on the person receiving the property: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.16Tax Foundation. Estate and Inheritance Taxes by State, 2025 Iowa eliminated its inheritance tax effective January 1, 2025. In all five remaining states, the rate depends on your relationship to the person who died. Spouses are fully exempt everywhere. Children and other close relatives either pay nothing or face low rates. Distant relatives and unrelated beneficiaries face the highest rates, reaching up to 16% in some states. Maryland is the only state with both an estate tax and an inheritance tax.
One narrow scenario can reach you personally for estate tax. If the estate distributes all its assets to beneficiaries before paying the estate tax, the IRS can pursue each beneficiary for the unpaid tax, generally up to the value of the assets that beneficiary received.17Internal Revenue Service. Transferee and Transferor Liabilities This is rare and usually a sign of premature distributions or an insolvent estate.