In general, file and prepare the final individual income tax return of a deceased person the same way you would if the person were alive. Report all income up to the date of death and claim all eligible credits and deductions.
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%.
California does not impose a state-level estate or inheritance tax, which is good news for families who inherit property in the state.
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.
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.
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.
While some debts disappear after the debtor dies, that's not true of tax debts. That debt is now owed to the IRS by the deceased's estate, and the IRS will attach a lien to it for the amount owed. If the estate includes property, like a home, the lien may include that property.
If due, an inheritance tax is applied only to the portion of an inheritance that exceeds an exemption amount. Above that threshold, tax is usually assessed on a sliding basis. Rates typically begin in the single digits and rise to between 15% and 18%.
While the federal government doesn't impose an inheritance tax, six states do: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. (Iowa passed a law that abolishes its inheritance tax after 2024.)
Immediately after receiving an inheritance, you should notify your local Social Security office.
If a primary beneficiary has predeceased the account owner or for some reason they don't want to claim an inherited 401(k), the money would then go to the next contingent beneficiary named. The beneficiary that inherits 401(k) assets is responsible for paying income tax on the money when they begin withdrawing it.
Funeral expenses aren't tax deductible for individuals, and they're only tax exempt for some estates. Estates worth $11.58 million or more need to file federal tax returns, and only 13 states require them. For this reason, most can't claim tax deductions.
Widows often receive less income but will be pushed to higher tax brackets. In addition to higher tax rates, widows lose half the standard deduction as a single filer, increasing their tax bill as a result.
The personal representative of an estate is an executor, administrator, or anyone else in charge of the decedent's property. The personal representative is responsible for filing any final individual income tax return(s) and the estate tax return of the decedent when due.
The IRS doesn't need a copy of the death certificate or other proof of death.
Debts are not directly passed on to heirs in the United States, but if there is any money in your parent's estate, the IRS is the first one getting paid. So, while beneficiaries don't inherit unpaid tax bills, those bills, must be settled before any money is disbursed to beneficiaries from the estate.
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.
According to IRS regulations, executors and administrators must file proper tax returns for deceased persons. If they fail to do so, the IRS can hold them personally liable for the unpaid taxes.
- An Executor or Legal Representative
Whether an executor or legal representative, they are responsible for paying the property taxes as long as the property is part of the estate.
Annual gift tax exclusion
The gift tax limit is $18,000 in 2024 and $19,000 in 2025. Note that this annual exclusion is per gift recipient. So, you could give away the limit to several different people in a single year and still not have to file a gift tax return and possibly pay the gift tax.
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.
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.