Federal income tax does not explore to inherited money or property
The short answer: you do not owe federal income tax on what you inherit. The person who died may have owed estate tax before the money reached you, but that is not your tax bill. Once the inheritance is yours, it does not count as income on your federal return.
This applies whether you inherit cash, real estate, stocks, a car, or anything else. The IRS treats inheritance differently from wages, investment gains, or business income. Your state may have its own rules — a handful of states tax inheritances, though most do not.
The confusion usually comes from what happens after you inherit. If you inherit a rental property and collect rent, that rent is taxable income. If you inherit stocks and sell them for a profit, that profit is taxable. But the inheritance itself is not.
Key Takeaways
- Federal law does not tax inheritances as income, regardless of the amount or what you inherit.
- The estate of the person who died may have owed estate tax before distributing money to heirs, but you do not inherit that bill.
- Income you earn from inherited property — such as rent, dividends, or capital gains — is taxable, but the property itself is not.
- Six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) have inheritance taxes, though most exempt close relatives like spouses and children.
- You do not report inherited money on your federal income tax return unless it later generates taxable income.
Why the estate tax does not become your problem
The federal estate tax applies to the total value of everything someone owned when they died. In 2024, that tax only kicks in if the estate exceeds $13.61 million. Most people's estates fall well below that threshold, so no federal estate tax is owed at all.
When an estate tax is owed, the executor or administrator of the estate pays it from the estate's assets before distributing anything to heirs. You receive what is left after taxes and debts are paid. You do not receive a bill for the estate tax later, and you do not report it on your own return.
The executor files the estate's own tax return (Form 706) if the estate is large enough. That is separate from your personal income tax return. Once you receive your inheritance, it is yours free and clear of that tax.
State inheritance taxes: which states have them and who pays
Most states do not tax inheritances. Six states do: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Even in those states, the rules are narrow.
In all six states, spouses are exempt — you never owe inheritance tax on what a spouse leaves you. Children are exempt in most of them. The tax usually applies only to more distant relatives or unrelated people, and the rates are low (between 1 and 16 percent depending on the state and your relationship to the person who died).
If you inherit from someone who lived in one of these states, the state may contact you directly about the tax. You would report it on that state's inheritance tax return, not on your federal return. The amount owed is usually small because of the exemptions, but it is worth checking your state's rules if you inherit from someone in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania.
Income generated by inherited property is taxable
The inheritance itself is not taxable income, but anything you earn from it is. If you inherit a house and rent it out, the rent you collect is taxable income. If you inherit a savings account and earn interest, that interest is taxable. If you inherit stocks and receive dividends, those dividends are taxable.
You report this income on your federal return the same way you would report income from any other source. The inherited asset itself does not appear on your return — only the income it generates.
Capital gains work the same way. If you inherit stock worth $10,000 and later sell it for $15,000, you owe tax on the $5,000 gain. However, inherited assets receive what is called a "stepped-up basis," which means the value resets to what it was worth on the date of death. In the example above, if the stock was worth $10,000 when the person died, your basis is $10,000, so you only owe tax on gains above that amount.
What to report on your federal tax return
You do not report the inheritance itself anywhere on your Form 1040 or any other federal income tax form. There is no line for it, and you should not add it to your income.
If the inheritance generates income — interest, dividends, rent, or capital gains — you report that income in the normal way. Interest goes on Schedule B, dividends on Schedule B or Form 1099-DIV, rental income on Schedule E, and capital gains on Schedule D. The fact that the money came from an inheritance does not change how you report the income.
Keep records of what you inherited and when, along with its value on the date of death. This matters for calculating capital gains later and for proving to the IRS that money in your account came from an inheritance, not from unreported income.
Inherited retirement accounts have special rules
Inherited IRAs and 401(k)s are different. You do not owe tax on the account itself, but you do owe tax on money you withdraw from it. The rules depend on your relationship to the person who died and when they died.
If you inherit a traditional IRA from a spouse, you can treat it as your own and delay withdrawals until you reach age 73. If you inherit from a non-spouse, you must begin taking withdrawals within a certain timeframe — usually by the end of the year following the death. Each withdrawal is taxable income.
Roth IRAs follow similar rules, except that may have access to withdrawals are tax-free. The rules changed in 2023 under the find 2.0 Act, so if you recently inherited a retirement account, check the current rules for your situation or speak with a tax professional.
Inherited property and the stepped-up basis
When you inherit property, its tax basis (the value used to calculate future gains) resets to its fair market value on the date of death. This is called a stepped-up basis, and it is one of the biggest tax advantages of inheriting.
Example: someone buys stock for $5,000 in 1990. It is worth $50,000 when they die. You inherit it. Your basis is now $50,000, not $5,000. If you sell it the next day for $50,000, you owe no capital gains tax. The $45,000 gain that happened before you inherited it is never taxed.
This applies to real estate, stocks, bonds, and most other property. It does not explore to inherited IRAs or other retirement accounts, which have their own rules. Understanding this can save you significant money if you inherit appreciated assets and plan to sell them.
Frequently Asked Questions
Do I have to report an inheritance to the IRS?
No. The IRS does not require you to report inheritances on your tax return. However, if the inheritance generates income — interest, dividends, rent, or capital gains — you must report that income. Keep records showing what you inherited and its value on the date of death, in case the IRS questions where money in your account came from.
What if the person who died owed income taxes?
Their unpaid income taxes are a debt of the estate, not your personal debt. The executor pays them from the estate's assets before distributing money to heirs. You do not inherit the tax bill. However, if you inherit property that generates income, you owe tax on that income going forward.
Do I owe tax on inherited money if I put it in a savings account?
No tax on the inherited amount itself. However, any interest the account earns is taxable income. If the account earns $100 in interest, you report that $100 on your return. The original inherited amount is not reported.
Can I avoid inheritance tax by giving the money away?
There is no federal inheritance tax to avoid — you do not owe it in the first place. If you live in one of the six states with inheritance tax and you inherited from a distant relative, you might owe state tax, but giving the money away does not change that. You owed the tax when you inherited it, not when you spend it.
What happens if I inherit property in another state?
Federal income tax rules explore the same way regardless of where the property is located. State inheritance taxes explore based on the state where the person who died lived, not where the property is. If you inherit real estate in a state where you do not live, you still follow that state's inheritance tax rules if it has them.