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.
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%.
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.
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.
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.
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).
This means an individual can leave or gift to non-spouse beneficiaries $13,610,000 without having to pay federal transfer taxes. A married couple will be able to shield $27,220,000. 1 The maximum federal estate and gift tax rate remains at 40% for 2024.
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.
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.
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.
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.
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.
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.
Federal tax laws do not consider most inherited assets to be taxable income.
While beneficiaries don't owe income tax on money they inherit, if their inheritance includes an individual retirement account (IRA), they will have to take distributions from it over a certain period and, if it is a traditional IRA rather than a Roth, pay income tax on that money.
States with inheritance taxes (Iowa, Kentucky, Nebraska, Maryland, New Jersey, and Pennsylvania) also use various exemptions and tax rates. For example, in New Jersey, surviving spouses, parents, children, and grandchildren are all exempt from the tax.
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.
Payable on death bank accounts is taxable. Depending on the state, some of the money in the account would need to pay off inheritance or death taxes.
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, ...
For the inheritance process to begin, a will must be submitted to probate. The probate court reviews the will, authorizes an executor and legally transfers assets to beneficiaries as outlined. Before the transfer, the executor will settle any of the deceased's remaining debts.
Law of Dominance
This is also called Mendel's first law of inheritance. According to the law of dominance, hybrid offspring will only inherit the dominant trait in the phenotype. The alleles that are suppressed are called the recessive traits while the alleles that determine the trait are known as the dominant traits.