If you are a beneficiary of property or income from the estate, you could be impacted on your federal income tax return. You must report any income you receive passed through from the estate to you and reported on a Schedule K-1 (1041) on your income tax return.
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.
For detailed reporting and filing information, see the Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR and the instructions for your income tax return.
If you have an amount on Schedule K-1 (541), line 2, column (c), report this amount on Schedule CA (540), Part I, Section A, line 3, or Schedule CA (540NR), Part II, Section A, line 3, column B or column C, whichever is applicable.
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.
The partnership files a copy of Schedule K-1 (Form 1065) with the IRS. For your protection, Schedule K-1 may show only the last four digits of your identifying number (social security number (SSN), etc.). However, the partnership has reported your complete identifying number to the IRS.
You are subject to tax on your share of the estate's or trust's income, and you must include your share on your individual tax return. Schedule K-1 (541), column (b) shows amounts from your federal Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc.
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%.
Once the court receives the petition, it will set a date for the initial probate proceeding, which is where an executor or administrator of the estate will be appointed to oversee the probate process and make distributions of estate assets to beneficiaries or heirs upon its completion.
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).
As a beneficiary, you can use the money to cover funeral costs, bills, child care, or save it for the future. You get to decide how you use the money and how you receive the payout. But to receive your life insurance death benefit, you first have to file a claim.
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.
In general, inherited money is not considered taxable income for the beneficiary. You do not need to report the inheritance as income on your tax return. However, there are specific situations in which taxes might come into play.
While it is often beneficial to communicate with beneficiaries regarding the estate administration, executors are not required to comply with every single request for information. Beneficiaries are often surprised to discover that in reality they have a right to very little information regarding an estate.
“Beneficiary income”. This applies where the trustee pays income to a beneficiary. The income is then treated as if the beneficiary had earned it themselves. The beneficiary's income will be added to their other income and they will in most cases, be taxed at their personal tax rate.
Immediately after receiving an inheritance, you should notify your local Social Security office.
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.
The best way to avoid the inheritance tax is to manage assets before death. To eliminate or limit the amount of inheritance tax beneficiaries might have to pay, consider: Giving away some of your assets to potential beneficiaries before death. Each year, you can gift a certain amount to each person tax-free.
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.
If you're the beneficiary of a bare trust you are responsible for declaring and paying tax on its income. Do this on a Self Assessment tax return. If you do not usually send a tax return and need to, you must register for Self Assessment by 5 October following the tax year you had the income.
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.
Federal tax laws do not consider most inherited assets to be taxable income.
The IRS doesn't expect individuals to file a K-1. However, they will compare your tax return to the information filed by your partnership. Partnerships that don't meet their Schedule K-1 responsibilities can also face expensive filing penalties.
As far as K-1 distributions are concerned, they are generally not considered taxable income.