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%.
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.
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 a taxpayer receives a distribution from an inherited IRA, they should receive from the financial instruction a 1099-R, with a Distribution Code of '4' in Box 7. This gross distribution is usually fully taxable to the beneficiary/taxpayer unless the deceased owner had made non-deductible contributions to the IRA.
Immediately after receiving an inheritance, you should notify your local Social Security office.
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.
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.
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.
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.
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.
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.
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 receives an inheritance, it can affect their eligibility for these benefits, as the inheritance is considered part of their capital. If your total savings (including the inheritance) exceed certain thresholds, you may lose eligibility for means-tested benefits.
A generous impulse could paradoxically result in the beneficiary being denied valuable benefits. That's because getting an inheritance can cause the Social Security Administration to reduce or stop SSI benefits. Also, not reporting an inheritance can lead to penalties and a benefit suspension of up to three years.
Without a trust, the inheritance you receive may count as extra income or assets that either disqualifies you from receiving government benefits, or results in you getting fewer benefits.
What determines whether you need to report the information or not is Box 1, distribution. If that number is zero, then you do not need to report the form. However, even though there is no taxable distribution, you are required to report the distribution.
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. In addition, any property you receive from the estate will typically be considered valued at its fair market value at the date of the original owner's death.
2024 Federal Estate and Gift Tax Amounts
Federal Exemption Amount. The amount which can pass free of federal estate, gift and generation-skipping taxes (“the federal basic exclusion amount”) has increased in 2024 from $12.92 million to $13.61 million per person.
Inheritances in the form of cash are not taxable to the recipient at the federal level, so the money in the savings account that you are inheriting from your father is not taxable to you nor do you have to report it on your federal tax return.
Do you have to report it? The rule around individuals who receive an inheritance is no, you don't. But the bank is going to report it, and that's good enough. So, when you get your inheritance, the real plan is to now plan your estate.
While the principal amount of the CD transfers without income tax issues, any interest earned after death and before transfer will be treated as ordinary income on the tax return of the person who inherits it.