No, an inheritance is not included in your gross income for federal tax purposes. Section 102 of the Internal Revenue Code excludes the value of property you acquire by bequest, devise, or inheritance from taxable income, whether that property is cash, a house, stocks, or anything else.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances If you inherit a $50,000 bank account, none of that $50,000 gets added to the wages, dividends, and other income you report on your Form 1040. The transfer itself is tax-free to you.
That answer covers the property you receive. It does not cover everything connected to an inheritance, and the situations that do trigger tax are where beneficiaries most often get caught out.
What the Exclusion Does and Doesn’t Cover
Section 102(a) shields the inherited asset. Section 102(b) is explicit that income the property produces after you own it is not shielded.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances Inherit a rental house, and the rent you collect from that point on is ordinary income reported on Schedule E.2Internal Revenue Service. Topic No. 414, Rental Income and Expenses Inherit stocks, and dividends paid after the date of death are taxable to you and reported on Form 1099-DIV.3Internal Revenue Service. Instructions for Form 1099-DIV Interest on inherited bonds is the same story on a Form 1099-INT.
Life insurance proceeds paid to you because of the insured person’s death are generally excluded from gross income under a separate rule, Section 101.4Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits If the insurer holds the proceeds and pays you interest on them, that interest is taxable.5Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
If your inheritance flows through a trust, the trust’s income that gets distributed keeps its character. Interest comes out as interest, dividends as dividends, capital gains as capital gains, all reported to you on a Schedule K-1 (Form 1041) and carried to your own return.6IRS.gov. 2025 Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR Principal from the trust, representing the original inherited property, generally isn’t taxable income to you.
Selling an Inherited Asset
When you sell inherited property, you owe capital gains tax only on appreciation that happened after the original owner’s death. Section 1014 steps up your cost basis to the fair market value on the date of death, effectively wiping out the appreciation that built up during the decedent’s lifetime.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Take stock the original owner bought decades ago at $20 a share. On the date of death it’s worth $100. Your basis is $100. Sell a year later at $110 and you owe capital gains tax on $10 per share, reported on Schedule D and Form 8949. Sell at $100 or less and you owe nothing on the sale. The same treatment applies to real estate, business interests, and most other inherited property.
If the estate was large enough to file a federal estate tax return (Form 706), the executor is required to send you a Schedule A from Form 8971 listing each asset you inherited and its reported value, and your basis cannot exceed that figure.8IRS.gov. Instructions for Form 8971 and Schedule A Hold onto that document. For real estate, a dated appraisal is worth having, because the IRS can question your basis years later when you sell.
Inherited Retirement Accounts: The Big Exception
Traditional IRAs and 401(k)s are where the “inheritance isn’t income” rule breaks down. The original owner contributed pre-tax dollars, and nobody has yet paid income tax on that money. 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
Under the SECURE Act, most non-spouse beneficiaries of an owner who died in 2020 or later must fully empty the inherited account by the end of the 10th year after the year of death.9Internal Revenue Service. Retirement Topics – Beneficiary That can pack a lot of taxable income into a short window.
Whether you also have to take annual withdrawals during years one through nine depends on the deceased owner’s status. If the owner had already started required minimum distributions before death, you must continue annual withdrawals during years one through nine and clear the balance by year ten. If the owner died before their required beginning date, no annual amount is required along the way, as long as the account is fully distributed by the end of year ten.
Certain “eligible designated beneficiaries” are exempt from the 10-year rule and can instead stretch distributions over their own life expectancy: the surviving spouse, minor children of the account owner (until they reach 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
Spouses and Roth Accounts
A surviving spouse can roll an inherited retirement account into their own IRA and treat it as always having been theirs, using their own required minimum distribution schedule.9Internal Revenue Service. Retirement Topics – Beneficiary Kept as an inherited account instead, distributions can be delayed until the year the deceased spouse would have turned 73.
Inherited Roth IRAs follow the same distribution timeline as traditional IRAs, so the 10-year rule reaches most non-spouse beneficiaries here too. Qualified withdrawals come out tax-free because contributions were made with after-tax dollars. If the Roth is less than five years old at withdrawal, earnings may be subject to income tax, though contributions come out tax-free regardless of the account’s age.9Internal Revenue Service. Retirement Topics – Beneficiary
Income the Decedent Earned but Never Received
Some payments that arrive after death aren’t really an inheritance at all in tax terms. They represent income the deceased person earned while alive but hadn’t yet collected: unpaid wages or bonuses, sales commissions earned before death, accrued interest not yet reported. This is called income in respect of a decedent, and it’s fully taxable to whoever receives it, with the same character it would have had in the decedent’s hands.10Legal Information Institute (LII) / Cornell Law School. Income in Respect of Decedent These items also do not get a stepped-up basis. A $15,000 commission earned by your parent but paid to you after their death is ordinary income on your return.
If the estate also owed federal estate tax on the same income items, Section 691(c) allows an income tax deduction to prevent a full double hit. The calculation isn’t simple, but the deduction can be worth pursuing with professional help when it applies.11eCFR. Deduction for Estate Tax Attributable to Income in Respect of a Decedent
Watch Out for Inherited Savings Bonds
Series EE and Series I savings bonds are the most common trap in this category. Most bondholders defer reporting the accrued interest for years or decades. When you inherit the bonds, that deferred interest becomes taxable, either at redemption or maturity. Electronic bonds in TreasuryDirect split the interest at reissuance, so the estate gets a 1099-INT for interest up to that point. For paper bonds, the 1099-INT at redemption covers the entire lifetime of interest, and you may need to show the IRS that part was already reported by the estate.12TreasuryDirect. Tax Information for EE and I Bonds
Foreign Inheritances: Not Taxable, But You Must Report
An inheritance from a nonresident alien or foreign estate is still excluded from gross income under Section 102. The IRS still wants to hear about it. If your foreign bequests total more than $100,000 in the tax year, you file Part IV of Form 3520 with your return, and each individual gift or bequest above $5,000 must be identified separately.13Internal Revenue Service. Gifts From Foreign Person
The penalty for missing this filing is 5% of the unreported amount for each month late, up to 25%.14Internal Revenue Service. International Information Reporting Penalties On a $500,000 inheritance that’s $25,000 per month, capping at $125,000, for failing to file a form about money the IRS wasn’t going to tax. It’s an easy filing to overlook and an expensive one to fix.
Estate Tax and Inheritance Tax Are Separate From Income Tax
Three different taxes get lumped together in casual conversation, and only one of them touches your income tax return.
Federal estate tax is paid by the estate before assets reach you. For 2026, estates below $15 million per individual are exempt, and married couples can effectively double that through portability. Fewer than 1% of estates owe any federal estate tax at all.15Internal Revenue Service. What’s New – Estate and Gift Tax
State inheritance tax is paid by the beneficiary in five states: 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 closer relatives generally face lower rates or higher exemptions than more distant heirs. If the deceased lived in one of those states, check the state rules even though the federal government isn’t going to treat the inheritance as income.
Estate tax shrinks the estate before your share is calculated. Inheritance tax takes a cut of your share afterward. Neither is income tax. Federal income tax touches an inheritance only when you sell an asset for more than its stepped-up basis, when the property generates income after you own it, when you withdraw from an inherited tax-deferred retirement account, or when you receive income in respect of a decedent. For most beneficiaries, the answer to whether the inheritance itself belongs in gross income remains no.