If You Inherit Money, Is It Taxable Income?

Inherited money is generally not taxable as income at the federal level. Under federal law, the value of property you receive through a bequest or inheritance is excluded from your gross income.¹ If a relative leaves you $200,000 in a checking account, you don’t report a dime of it on your tax return. The exceptions that trip people up involve retirement accounts, income the inherited assets earn after you own them, foreign estates, and a small number of states that tax beneficiaries directly.

The Difference Between an Inheritance and Income

An inheritance is a transfer of wealth, not earnings, so it sits outside the definition of gross income.² The federal estate tax, when it applies, is paid by the deceased person’s estate before anything reaches you. Income tax is a separate system that taxes the living, and receiving inherited property is not an income event.

What federal law excludes is the property itself. Any income that property throws off after you own it is a different matter, and certain assets carry a built-in tax bill because the money inside them was never taxed to begin with.¹

Inherited Retirement Accounts Are the Real Tax Event

Inheriting a Traditional IRA or 401(k) is the most common way an inheritance produces a genuine tax bill. Contributions went in pre-tax, so every dollar you withdraw comes out as ordinary income at your marginal rate, which can reach 37% for 2026.³ How quickly you have to pull that money out 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 the account as an inherited IRA and take distributions based on your own life expectancy.⁴ For a younger spouse, the rollover almost always wins because it maximizes years of tax-deferred growth.

Non-Spouse Beneficiaries and the 10-Year Rule

Most non-spouse beneficiaries, including adult children, grandchildren, and siblings, must empty the entire inherited account by the end of the tenth year after the original owner’s death.⁴ The SECURE Act of 2019 introduced this window and ended the older “stretch IRA” that spread withdrawals over a beneficiary’s lifetime.

Whether you also have to take annual withdrawals during those ten years depends on when the account owner died relative to their required beginning date. If they died before it, you owe nothing in years one through nine as long as the account is empty by year ten. If they died after it, you must take an annual minimum distribution in each of the first nine years and clean out the balance in year ten.⁴ Missing a required annual distribution brings a 25% excise tax on the shortfall, which drops to 10% if you correct the mistake within two years.⁵

The strategic question is how to time the withdrawals. Spreading them across the full ten years usually keeps the annual tax hit lower. Waiting until year ten and taking a single lump sum is almost always a mistake because it stacks the entire balance into one year’s income.

Eligible Designated Beneficiaries

A narrow group of non-spouse beneficiaries can still stretch withdrawals over their own life expectancy instead of following the ten-year rule. These eligible designated beneficiaries include disabled or chronically ill individuals, anyone not more than ten years younger than the deceased account owner, and minor children of the deceased. Once a minor child reaches age 21, a fresh 10-year clock starts. An eligible designated beneficiary can also elect the 10-year rule if that timing fits their situation better.⁴

Inherited Roth IRAs

Inherited Roth IRAs follow the same withdrawal timelines as inherited Traditional IRAs, but the distributions are generally tax-free because the original contributions were after-tax.⁴ One caveat: if the Roth was less than five years old when the owner died, the earnings portion of withdrawals can be taxable until the five-year holding period is met. Contributions still come out tax-free.

The Stepped-Up Basis on Stocks and Real Estate

When you inherit appreciated property such as stocks, mutual funds, or real estate, the cost basis resets to the fair market value on the date of the owner’s death rather than what the owner originally paid.⁶ This step-up can wipe out decades of built-up capital gains.

Consider a parent who bought stock for $20,000 and left it worth $300,000. Your basis is $300,000. Sell it right away for $300,000 and you owe zero capital gains tax. Hold it and sell later for $340,000 and you owe tax only on the $40,000 of post-death appreciation. Inherited assets also qualify automatically for long-term capital gains rates of 0%, 15%, or 20% depending on your income, no matter how briefly you hold them.²

This is far better than receiving the same asset as a lifetime gift. Gifted assets carry over the donor’s original basis, so the recipient eventually pays capital gains tax on the full appreciation.

Community Property States Get a Double Step-Up

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. If a married couple jointly owned stock worth $500,000 with an original basis of $100,000, the surviving spouse’s basis in the whole holding becomes $500,000.⁷ That can be worth tens of thousands in avoided capital gains tax.

Life Insurance, Annuities, and Savings Bonds

Not every non-retirement asset behaves the same way. Three common ones each have their own rule.

Life insurance death benefits paid to a named beneficiary are generally not included in gross income.⁸ A $500,000 term life payout is not reportable. If the insurer holds the money and pays it out with interest over time, the interest portion is taxable even though the principal is not.

Inherited annuities work the opposite way. If you inherit a non-qualified annuity, the earnings portion of each distribution is taxed as ordinary income; the original owner’s contributions come back tax-free.⁹ For lump-sum withdrawals, the IRS treats the earnings as coming out first, so the early money is fully taxable until all gains have been withdrawn.

Series EE and Series I savings bonds accumulate interest that the original owner usually deferred paying tax on. Someone eventually owes tax on that deferred interest. If the estate reported the accrued interest on the decedent’s final return, you owe tax only on interest earned after you took ownership. If not, you may receive a 1099-INT for the full accumulated interest when you cash the bond, and it’s on you to document the split.¹⁰

Income the Inherited Asset Earns After You Own It

Even when the asset itself is tax-free, income it generates once you own it is not. Dividends on inherited stocks, rent from inherited property, and interest on inherited bank accounts are all ordinary income you report on your return.

Between the death and the final distribution to heirs, the estate itself may earn income on those assets. The estate reports it on Form 1041. If the estate distributes that income to you rather than paying tax on it at the estate level, you receive a Schedule K-1 showing your share and report the amounts on your personal return.¹¹ Keep the K-1 with your records; don’t file it with your return unless it shows backup withholding.

State Inheritance and Estate Taxes

The federal government doesn’t tax you for receiving an inheritance, but a small number of states do. State-level taxes on inherited wealth come in two forms: estate taxes paid by the estate before distribution, and inheritance taxes paid by you as the recipient.

Inheritance Taxes on the Beneficiary

Five states impose an inheritance tax directly on the beneficiary: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa’s inheritance tax was fully repealed effective January 1, 2025.¹² In all five, surviving spouses pay nothing, and close relatives either escape the tax entirely or pay the lowest rates. More distant relatives and unrelated heirs pay steeper rates:

Pennsylvania: direct descendants pay 4.5%, siblings 12%, most other heirs 15%.
New Jersey: siblings pay 11% to 16% 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 face 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% on amounts above.

The tax follows the deceased person’s state of residence, not yours. If an uncle in Pennsylvania leaves you money and you live in Texas, Pennsylvania still gets its cut.

State Estate Taxes

Twelve states and the District of Columbia impose their own estate taxes, paid by the estate rather than by individual beneficiaries. State exemptions kick in much lower than the federal one, ranging from $1 million in the lowest state to roughly $14 million in the highest, with most between $2 million and $7 million. Maryland is the only state that imposes both a state estate tax and an inheritance tax.

The Federal Estate Tax

The federal estate tax is paid by the estate, not by you, but it affects what ultimately reaches you. For 2026, the exemption is $15 million per individual. Married couples can shelter up to $30 million using portability of the unused exemption. Amounts above the exemption are taxed at rates up to 40%.¹³ At those thresholds, fewer than one percent of estates owe any federal estate tax.¹⁴

Foreign Inheritances Have a Reporting Rule With Teeth

If you receive more than $100,000 in a tax year from a non-U.S. person or foreign estate, you have to report it to the IRS on Form 3520 even though the money itself isn’t taxable.¹⁵ This is disclosure, not payment, but the penalty for skipping it is the greater of $10,000 or 35% of the gross bequest, with another $10,000 tacked on every 30 days after the IRS gives notice.¹⁶ On a $500,000 foreign inheritance, the initial penalty alone runs $175,000. One form avoids it.

You Can Refuse an Inheritance

You are not required to accept what someone leaves you. If receiving the assets would create an unwanted tax burden, push you into a higher bracket, or affect your eligibility for government benefits, you can formally refuse some or all of the bequest through a qualified disclaimer. The disclaimer must be in writing, delivered within nine months of the date of death (or within nine months of turning 21 for a minor), and you cannot have already accepted or benefited from the property.¹⁷

A qualified disclaimer is treated as if the transfer never happened. The property passes to the next beneficiary under the will or state law, and you are not treated as having made a taxable gift. You cannot direct where the disclaimed property ends up; naming a substitute recipient invalidates the disclaimer.

1
GovInfo. 26 U.S. Code 102 – Gifts and Inheritances
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Internal Revenue Service. Gifts and Inheritances
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
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Internal Revenue Service. Retirement Topics – Beneficiary
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Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
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Internal Revenue Service. Publication 551, Basis of Assets
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Internal Revenue Service. Community Property
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Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
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Internal Revenue Service. Publication 575, Pension and Annuity Income
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TreasuryDirect. Tax Information for EE and I Bonds
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Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR
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Justia Law. Iowa Code 450.98 – Tax Repealed
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Internal Revenue Service. What’s New – Estate and Gift Tax
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Internal Revenue Service. Estate and Gift Tax FAQs
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Internal Revenue Service. Instructions for Form 3520
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Internal Revenue Service. Failure to File Form 3520/3520-A Penalties
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eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer