Whether you have to report an inheritance on your taxes depends on what you inherit and the subsequent handling of that inheritance. While inheritances themselves are often not subject to federal income tax, certain inherited assets can generate taxable income once they begin producing interest, dividends or distributions. Because inheritance decisions can affect long-term tax outcomes and financial planning, working with a financial advisor can help you understand the rules and integrate inherited assets into your broader financial picture.
Do I Have to Report Inheritance on My Taxes?
In most cases, beneficiaries do not need to report an inheritance as income on their federal tax return. The IRS generally does not treat inherited assets as taxable income when they are received. This applies whether the inheritance comes in the form of cash, investments or property.
Whether or not you have to report inheritance on your taxes becomes more relevant if the inheritance begins generating income. While the inherited asset itself may not be taxable, income produced by that asset typically is.
It’s also important to note that tax reporting obligations differ from tax liability. Even no tax is owed at the time of inheritance, beneficiaries may still need to report future income associated with inherited assets.
Types of Inherited Assets and Their Tax Treatment
The tax treatment of an inheritance depends largely on the type of asset received, as different assets create different reporting and tax obligations for beneficiaries. While inheritances themselves are often not taxable at receipt, many inherited assets can generate taxable income later.
- Cash inheritances. Cash received from an estate is generally not taxable and is not necessary to report as income. However, any interest earned on that cash after it is received is typically taxable. You must report this income in the year you earn it.
- Investment accounts and securities. Stocks, bonds and mutual funds inherited from an estate are not taxed at the time of inheritance. Dividends, interest and capital gains generated after the transfer are usually taxable to the beneficiary. These earnings help determine whether you have to report inheritance on your taxes in future years.
- Real estate. The value of inherited real estate is not reported as income when received. However, rental income earned from the property is generally taxable. If you sell the property, you must report capital gains based on the adjusted cost basis.
- Retirement accounts. Inherited retirement accounts often involve the most complex tax rules. While the account itself is inherited, distributions from traditional retirement accounts are generally taxable to beneficiaries. The timing and amount of distributions affect both reporting and tax liability.
Inherited Retirement Accounts and Taxes
Inherited retirement accounts are subject to specific tax and reporting rules that depend on the type of account and the beneficiary’s relationship to the original owner. While the account itself is inherited, distributions taken from it often determine whether and how the inheritance is reported for tax purposes.
- Traditional IRAs and 401(k)s. Distributions from inherited traditional retirement accounts are generally taxable as ordinary income to the beneficiary. The beneficiary must report these amounts on the tax return for the year in which they take the distributions.
- SECURE Act distribution rules. The SECURE Act introduced new distribution timelines for many non-spouse beneficiaries. In many cases, these beneficiaries must fully distribute inherited retirement accounts within 10 years. Each distribution taken during this period may be taxable, depending on the account type 1 .
- Inherited Roth IRAs. Qualified distributions from inherited Roth IRAs are generally tax-free. However, beneficiaries may still need to report the distributions on their tax return. Even when no tax is owed, proper reporting helps ensure compliance with IRS rules.
Estate Taxes vs. Inheritance Taxes
It’s common to confuse estate taxes and inheritance taxes, but they are not the same. Federal estate tax applies to the estate before the distribution of assets, rather than to the beneficiary. Most estates fall below federal estate tax thresholds.
Inheritance taxes, on the other hand, apply to beneficiaries. Further, only some states impose them. Whether or not you owe inheritance tax depends on the state where the deceased lived or where the property is located.
For federal income tax purposes, beneficiaries typically do not report estate tax payments. However, state-level inheritance taxes may still apply, even when no federal tax is owed.
Do I Have to Report Inherited Property on My Tax Return?
Inherited property itself is not reported as income when received. However, reporting is generally required if you sell the property or it generates income. Cost basis rules play a key role here.
Most inherited assets receive a step-up in basis to their fair market value at the date of death. Beneficiaries report gains or losses based on this adjusted basis. This can reduce capital gains when they sell the property.
Note that if you sell inherited property, you must report the transaction on your tax return.
Special Situations That May Affect Reporting
Some inheritances involve additional complexity. Assets received through trusts, for example, may follow different reporting rules depending on the trust structure. Income distributed from a trust is often taxable to the beneficiary.
When multiple beneficiaries inherit the same asset, income and reporting responsibilities are typically divided based on ownership percentages. Clear records in this situation help avoid reporting errors.
Inherited assets from foreign estates may also trigger additional reporting requirements. These situations often involve specialized forms and disclosures, making professional guidance especially valuable.
Common Mistakes Beneficiaries Make
One common mistake many beneficiaries make is assuming that all inheritance-related income is tax-free. While the inheritance itself may not be taxable, income generated afterward often is. This misunderstanding can lead to underreporting.
Another mistake involves failing to report distributions from inherited retirement accounts. These distributions are usually taxable. It is vital to report them accurately.
Misunderstanding cost basis rules for inherited property is another frequent issue. Incorrect basis calculations can result in overpaying or underpaying capital gains taxes.
How a Financial Advisor Can Help With Inherited Assets
Receiving an inheritance often coincides with an already difficult time, the loss of a loved one, while simultaneously requiring a series of complex financial decisions under pressure. Whether the estate includes retirement accounts, taxable investment portfolios, real estate, or a mix of asset types, the choices a beneficiary makes in the months following can have lasting tax and financial consequences.
A financial advisor can help you understand which inherited assets generate taxable income, how distribution timing affects your overall tax exposure, and whether it makes sense to sell, reinvest, or hold what you’ve received. They can also assess how the inheritance fits or conflicts with your existing financial plan, and help you avoid reactive decisions that feel right in the short term but create complications later.
Questions worth bringing to an advisor might include: What are the required distribution rules for this inherited account? How will selling this asset affect my taxes this year? Should I pay off debt with this money or invest it? Does this change my retirement timeline?
Professional guidance can be helpful because inherited assets involve strict rules, time-sensitive decisions and potential tax consequences. An advisor can help explain the options and consequences so choices are made with a clear view of what’s involved.
Bottom Line
In most cases, an inheritance itself is not reported as income, but taxes may apply if the assets generate income or are later sold. A financial advisor can help explain reporting requirements and how inherited assets fit into your overall financial plan.
Tax Planning Tips
- A financial advisor can help explain which inherited assets require tax reporting and how those rules apply to your specific situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s tax return calculator has updated brackets and rates to help you estimate your next refund or balance.
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