Inherited assets such as cash, stocks, real estate, and life insurance proceeds are generally not considered taxable income by the IRS at the federal level. Assets transferred to a spouse, specific bequests (cash or property), and assets below state/federal exemption thresholds (e.g., $13.61M for 2024) are typically non-taxable. However, income generated after inheritance is taxable.
You can typically inherit a large amount without federal taxes because the tax applies to the deceased's estate, not the recipient, and the exemption is very high: $13.99 million in 2025 and $15 million in 2026 per person, meaning most inheritances fall below this threshold. The key is that the estate's total value must exceed these limits for any tax to be owed by the estate. Inheritances themselves (cash, property) are generally not income, but earnings on them (like interest/dividends) or pre-tax retirement funds (like IRAs) are taxable.
Generally, you don't report the inheritance itself to the IRS because it's not considered taxable income for you federally; however, you must report income the inheritance generates (like interest or dividends), handle inherited retirement accounts (which are taxable), and report large foreign inheritances (using Form 3520). The deceased person's estate pays any federal estate tax (if applicable).
Every individual has a basic Inheritance Tax (IHT) threshold of £325,000, known as the Nil Rate Band. Assets below this value generally pass to beneficiaries free of tax. If the estate is worth more than that, IHT at 40% usually applies on the excess, unless exemptions or reliefs reduce the amount due.
Stocks and cash: Inherited cash generally isn't taxable unless the estate exceeds the applicable estate or inheritance taxes. Stocks also aren't taxable unless they are subject to estate or inheritance taxes but could result in capital gains taxes when you sell them.
Yes, you can give your son $100,000 tax-free in 2025 by utilizing the annual gift tax exclusion and your lifetime exemption, but you'll need to report the gift to the IRS on Form 709 since it exceeds the $19,000 annual limit, though you won't pay tax unless you exceed your much larger $13.99 million lifetime gift/estate tax exemption. The gift is considered yours (the giver) for tax purposes, not your son's.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
No, California does not impose an inheritance tax. If you inherit money, you will not have to pay a tax on the amount you inherited. The money you inherited will not be considered income.
Charity exemption
Like the spousal exemption, assets passing to charity on death are exempt from inheritance tax. As such, if an entire estate passes to charity, there will be no inheritance tax due.
How does the IRS learn about inherited assets? Inherited assets may appear through estate filings, financial institution reporting, probate documents, property title transfers or tax reporting by executors and trustees.
Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.
You can typically inherit a very large amount from your parents before hitting federal estate tax thresholds, which are around $15 million per individual in 2026, meaning most heirs receive tax-free inheritances because estates rarely exceed this limit; however, some states have their own estate or inheritance taxes, and income from inherited assets (like IRAs or rental income) is usually taxable, according to this U.S. Bank article, this Fidelity article, this Domain Money article, and this Tax Foundation article.
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.
While state laws differ for inheritance taxes, an inheritance must exceed a certain threshold to be considered taxable. For federal estate taxes as of 2024, if the total estate is under $13.61 million for an individual or $27.22 million for a married couple, there's no need to worry about estate taxes.
You can typically inherit a very large amount from your parents without paying federal tax, as the federal estate tax exemption is around $15 million per person for 2026, meaning only estates larger than that pay tax, not you directly. While you generally don't pay income tax on inheritances (except for pre-tax retirement funds like IRAs/401(k)s, which are taxed as income when withdrawn), some states have their own estate or inheritance taxes with much lower thresholds, affecting a smaller portion of wealth.
Typically, you will receive Form 1099-S reporting the sale of an inherited property which will show your sales proceeds. You will also need to determine your basis in the property to account for the sale correctly.
By far the biggest mistake people make when it comes to IHT Planning is simply not taking action. The issue with IHT and Estate Planning is that it is almost always something that 'can wait' until tomorrow (until it can't of course).
However, there is a little-known IHT loophole that does not have a set limit or post-gift survival requirement, known as 'Gifts for the Maintenance of Family'. Any gift that qualifies under this loophole is exempt from IHT. If HMRC decide that the gift was larger than reasonable, the reasonable part is still exempt.
The IRS primarily learns about large gifts when you file Form 709, the Gift Tax Return, for amounts exceeding the annual exclusion (e.g., $19,000 per person in 2025). They can also discover gifts through third-party reporting (banks reporting large cash transfers), audits of your estate, or by matching transactions to public records, especially for significant asset transfers like property, which might trigger property tax reassessments.