Last Updated: April 2026
Receiving an inheritance is one of the most significant financial events many people will experience — and one of the most misunderstood from a tax perspective. The good news: in the vast majority of cases, beneficiaries do not pay income tax on money or assets they inherit. The federal estate tax is paid by the estate, not the heir, and only applies to very large estates. However, there are important exceptions: inherited IRAs are taxable when withdrawn; real estate sold after inheritance generates capital gains above the stepped-up basis; and six states impose inheritance taxes directly on the beneficiary. This guide explains what you will and won't owe when you inherit money, investments, real estate, or retirement accounts.
Different types of inherited assets have different tax rules. Understanding which rules apply to what you have inherited is essential before making any financial decisions.
Inheriting cash or bank account funds: no income tax to the beneficiary. The money is not your income — it is a transfer from the estate. If the bank account earned interest in the year of death: the estate reports interest earned up to the date of death; you report interest earned after the date of death on your return (the bank will send a Form 1099-INT reflecting any post-death interest). No step-up issues for cash — it has no embedded capital gain.
Stepped up to FMV at date of death. If you inherit a brokerage account with $500,000 of stocks, the broker updates the cost basis to the date-of-death values. Any dividends paid after the date of death are your taxable income (reported on 1099-DIV). Capital gains realised after death are calculated against the stepped-up basis. Practical tip: obtain the date-of-death valuation in writing from the broker or estate executor — you will need this if you sell the inherited shares years later and the IRS questions your basis.
Inheriting an ownership interest in a business: the basis steps up to FMV at death. The business's inside assets (machinery, real estate, inventory) do not automatically step up — the step-up is to the ownership interest value. Section 754 election by the partnership/LLC can allow inside asset basis to step up to reflect the new outside basis — this is a complex but valuable election that the entity should make after a death. Consult a business CPA before any distributions, sales, or redemptions involving inherited business interests.
Inherited US savings bonds: the accrued interest has not been taxed to the decedent (EE and I bonds report interest at redemption). When you inherit a bond and cash it in, the accrued interest is IRD (Income in Respect of a Decedent) — taxable to you as ordinary income. The estate may also have paid estate tax on the bond value; you can deduct the proportionate estate tax attributable to the IRD item as a deduction on your Schedule A (the IRD deduction).
Many inheritances are distributed through trusts rather than directly from the estate. The tax rules differ depending on the type of trust.
Most revocable trusts created during the grantor's lifetime become irrevocable at death and distribute assets to beneficiaries. For tax purposes, assets in a revocable trust receive a step-up in basis at the grantor's death, just like directly inherited assets. The trust is treated as a grantor trust during the grantor's lifetime — at death, it becomes a separate taxpayer (trust), files a Form 1041, and pays out to beneficiaries. Distributions from a trust are generally not taxable income to the beneficiary to the extent they are distributions of corpus (principal) — but distributions of trust income (interest, dividends, capital gains distributed out) are taxable in the year distributed.
A trust created by a will (testamentary trust): funded with estate assets after probate. Trust income is taxable at trust tax rates (which reach the 37% top bracket at only $15,200 of income in 2026 — much lower than individual brackets). Many trustees distribute income to beneficiaries to shift the tax from trust rates to individual rates (beneficiaries typically in lower brackets). Beneficiaries report distributed trust income on Schedule K-1 received from the trust.
Some people name a trust (rather than an individual) as IRA beneficiary. The rules are complex: if the trust is a 'see-through trust' that qualifies under IRS rules (identifies eligible designated beneficiaries), the inherited IRA distributions can be stretched over the beneficiaries' life expectancies in some cases. If the trust does not qualify, the 5-year distribution rule applies. Naming a trust as IRA beneficiary requires specialist estate planning advice — the tax consequences of an improperly structured trust can be severe.
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Inherited IRAs, step-up basis planning, state inheritance tax, and estate administration tax require CPA guidance specific to your situation. TaxHub connects you with estate and inheritance tax specialists.
⚠ Not for simple single-state returns. Free filing is fine for straightforward W-2 situations.
Get Inheritance Tax Planning Help →In most cases, no. Money or property received as inheritance is excluded from your income under IRC §102 and is not reported on your Form 1040 as income. The main exceptions are: (1) Inherited traditional IRA or 401(k) funds — these are taxable as ordinary income when you withdraw them; (2) Income earned on inherited assets after the date of death (dividends, interest, rent) — taxable to you; (3) Capital gains if you sell inherited assets above their stepped-up basis; (4) State inheritance tax in the 6 states that impose it (Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Iowa for pre-2025 deaths). If you inherit a $100,000 savings account, a $200,000 brokerage account, and a $400,000 house, you owe no federal income tax on any of it at the time of inheritance — but your future tax situation depends on what you do with those assets.
Step-up in basis means that when you inherit assets, your starting cost basis for capital gains purposes is set equal to the fair market value of the asset on the date of the decedent's death — not what the decedent originally paid for it. Example: your parent paid $20,000 for stock in 1980. It is worth $300,000 when they die. You inherit it with a basis of $300,000. If you sell it the next day for $300,000, you owe $0 in capital gains. If you sell it 5 years later for $380,000, you owe capital gains only on the $80,000 gain above $300,000. The step-up effectively wipes out all capital gains that accrued during the decedent's lifetime. This is the most significant tax advantage of inheritance vs receiving the same assets as a gift (gifts carry over the donor's original basis, not a step-up).
As a non-spouse beneficiary of a traditional IRA (under the SECURE Act rules for deaths after January 1, 2020): you must withdraw the entire balance within 10 years of the date of death. Each withdrawal is ordinary income to you in the year you take it — there is no step-up in basis for IRAs. Withdrawal strategy: you can take the distributions at any pace within the 10 years. If you are in a lower income year (job gap, retirement, low income year), withdrawing more in that year minimises the tax. If you are a high earner throughout, withdrawing evenly over 10 years may be most tax-efficient. Required Minimum Distributions (RMDs): the IRS issued complex guidance on whether annual RMDs are required within the 10 years if the decedent had already begun RMDs — consult a CPA as this is actively evolving.
Pennsylvania imposes inheritance tax on inheritances from Pennsylvania decedents (based on where the decedent lived, not the beneficiary). The rate depends on your relationship: 0% for surviving spouses and charities; 4.5% for direct descendants (children, grandchildren) and ancestors (parents, grandparents); 12% for siblings; 15% for all other beneficiaries. The tax is calculated on the value of what you inherit. Example: you inherit $200,000 from your parent (Pennsylvania resident) as their child — you owe $200,000 × 4.5% = $9,000 in Pennsylvania inheritance tax. The tax is due within 9 months of the date of death. Pennsylvania offers a 5% discount if the tax is paid within 3 months. The inheritance tax is separate from any federal estate tax and applies regardless of the size of the estate.
Income in Respect of a Decedent (IRD) is income the decedent earned but had not yet received at death — most commonly traditional IRA balances, unpaid wages, and deferred compensation. This income is taxable to the beneficiary when received. If the decedent's estate paid federal estate tax and IRD items were included in the estate's gross value, the beneficiary can deduct the estate tax attributable to the IRD items as an itemized deduction on Schedule A. This prevents full double taxation. Example: you inherit $500,000 in traditional IRA funds; the estate paid $200,000 in estate tax partly attributable to the IRA; you can deduct a proportionate share (say $80,000) from your income on Schedule A when you take IRA withdrawals. The IRD deduction calculation requires the estate's Form 706 and CPA assistance.
This guide provides tax education, not investment or financial advice. From a purely tax perspective: selling immediately after inheritance results in minimal or zero capital gains (since basis was just stepped up to current FMV). Holding means future appreciation above the stepped-up basis will be taxable when you eventually sell. Whether to sell depends on your overall financial plan, diversification needs, and the specific assets — not just tax. For inherited IRA assets: the 10-year forced withdrawal rule means you must engage with the tax question regardless of investment preferences. Consult a financial advisor and a CPA together — the tax-optimal decision is not always the investment-optimal decision.
No — this is an important distinction. Assets given as gifts during the donor's lifetime do NOT receive a step-up in basis at the donor's death. The recipient carries over the donor's original cost basis (a 'carryover basis'). Assets included in the decedent's taxable estate DO receive the step-up. This creates a planning tension: gifts during life remove assets from the taxable estate (potentially reducing estate tax) but eliminate the step-up; keeping assets until death preserves the step-up but keeps them in the estate. For assets with large embedded capital gains (stocks, real estate), it often makes sense to hold them until death to capture the step-up — unless the estate is large enough that estate tax savings from gifting outweigh the lost step-up benefit. This analysis requires CPA and estate planning attorney input.