Inheritances aren't considered income for federal tax purposes, but subsequent earnings on the inherited assets, including interest income and dividends, are taxable (unless it comes from a tax-free source).
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%.
Transfer assets into a trust
Because those assets don't legally belong to the person who set up the trust, they aren't subject to estate or inheritance taxes when that person passes away. Setting up a trust also has other financial benefits, such as helping the estate avoid probate.
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.
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. Example: You inherit and deposit cash that earns interest income. Include only the interest earned in your gross income, not the inherited cash.
If the value of your share in inheritance is below $100K, you do not have any reporting requirements before the IRS. If it is $100K or more, you must file Form 3520 while filing your U.S. tax return. The form is informational only. You will not owe tax.
IRS Quietly Changes The Rule On How Your Children's Inheritance Will Be Taxed. The IRS issued Revenue Ruling 2023-2, which had a substantial impact on estate planning, particularly where an irrevocable trust is involved.
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.
An inheritance tax is levied on the value of the inheritance received by the beneficiary, and it is paid by the beneficiary. There is no federal inheritance tax. Inherited assets may be taxed for residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
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. The maximum coverage for each FDIC-insured account is $250,000.
Immediately after receiving an inheritance, you should notify your local Social Security office.
Each state has different estate tax laws, but the federal government limits how much estate tax is collected. Any estate worth more than $11.8 million is subject to estate tax, and the amount taken out goes on a sliding scale depending on how much more than $11.8 million the estate is worth.
Medium inheritance ($100,000)
If you receive a larger inheritance, first consider the recommendations above—fund an emergency savings account or pay off credit cards and loans. You can also use a portion of the money to pay off all or part of your mortgage or pay down student loan debt.
Can IRS seize inherited property? Yes, the IRS can seize inherited property for unpaid taxes after following its standard process of notices. Can the IRS take inheritance money? Yes, the IRS can take inheritance money for unpaid taxes.
You may be pleasantly surprised to know that inheriting money from a friend or family member will not cost you a single dollar in federal income tax. Instead, the U.S. tax system may impose a tax on the decedent's estate—which is the source of your inheritance money—if its value exceeds a certain amount.
Cash received as an inheritance isn't taxable, according to the IRS. But, if the cash you received later generates further income–for example, if you have it in an interest-bearing account–subsequent earnings may be considered taxable income.
The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift. However, form 709 is not the only way the IRS will know about a gift.
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
When someone inherits investment assets, the IRS resets the asset's original cost basis to its value at the date of the inheritance. The heir then pays capital gains taxes on that basis. The result is a loophole in tax law that reduces or even eliminates capital gains tax on the sale of these inherited assets.
The best place to begin your search is www.Unclaimed.org, the website of the National Association of Unclaimed Property Administrators (NAUPA). This free website contains information about unclaimed property held by each state. You can search every state where your loved one lived or worked to see if anything shows up.