Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate.
This means that when the beneficiary withdraws those monies from the accounts, the beneficiary will receive a 1099 from the company administering the plan and must report that income on their income tax return (and must pay income taxes on the sum).
Generally, beneficiaries do not pay income tax on money or property that they inherit, but there are exceptions for retirement accounts, life insurance proceeds, and savings bond interest. Money inherited from a 401(k), 403(b), or IRA is taxable if that money was tax deductible when it was contributed.
The income that inherited assets generate after they are inherited, such as dividends from stocks, rent from properties, or interest from cash accounts, is considered taxable income under Federal law.
Gifts and inheritance Personal income types
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
Many states assess an inheritance tax. That means that you, as the beneficiary, will have to pay taxes when you receive an inheritance. How much you'll be assessed depends on the state you live in, the size of your inheritance, the types of assets included, and your relationship with the deceased.
There is no federal tax for beneficiaries of POD accounts. There will be an inheritance tax, or death tax, depending on the state, that will need to be settled before any money can leave the account. If the deceased has any debt that has not been settled, the money in the account must go to paying that off first.
When you inherit property, the IRS applies what is known as a stepped-up cost basis. You do not automatically pay taxes on any property that you inherit. If you sell, you owe capital gains taxes only on any gains that the asset made since you inherited it.
An estate tax is levied on the estate of the deceased while an inheritance tax is levied on the heirs of the deceased. Only 17 states and the District of Columbia currently levy an estate or inheritance tax.
Immediately after receiving an inheritance, you should notify your local Social Security office.
When a house is transferred via inheritance, the value of the house is stepped up to its fair market value at the time it was transferred, according to the IRS. This means that a home purchased many years ago is valued at current market value for capital gains.
Purpose of Form
Use Schedule K-1 to report a beneficiary's share of the estate's or trust's income, credits, deductions, etc., on your Form 1040 or 1040-SR. Keep it for your records. Don't file it with your tax return, unless backup withholding was reported in box 13, code B.
The primary difference between a gift and an inheritance is the time each occurs. A gift is an asset passed on during a person's lifetime, whereas an inheritance is passed on after the person's death.
The states with no state estate tax as of mid-2023, are Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, ...
Including the District of Columbia, 19 states currently have a state estate or inheritance tax. These states are Connecticut, Delaware, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington.
You don't need to report a cash inheritance on your federal return. The IRS doesn't impose an inheritance tax. Only a handful of states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) have some kind of inheritance tax.
Any tax due will normally be taken out of the deceased's estate, and the executor will usually take care of it. This means you won't need to declare inheritance money to HMRC – an inheritance isn't classed as income, and therefore isn't taxable.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source.
Upon selling an inherited asset, if the inherited property produces a gain, you must report it as income on your federal income tax return as a beneficiary.
Deposit the money into a safe account
Your first action to take when receiving a lump sum is to deposit the money into an FDIC-insured bank account. This will allow for safekeeping while you consider how to make the best use of your inheritance.