Estate Planning | Making a Difference One Family at a Time

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When you receive an inheritance, you might wonder about your obligations to the IRS. Taxes can be confusing, and understanding your responsibilities ensures you stay compliant. Below, we’ll explore what you need to know about reporting an inheritance.

Understanding How Inheritances Are Taxed

An inheritance itself is not considered taxable income by the IRS. If you inherit cash, property, or other assets, you generally do not need to report the value of these items as income on your tax return.

Income Earned from Inherited Assets

While the inheritance itself isn’t taxable, any income generated from inherited assets must be reported. For instance:

  • Interest and Dividends: If you inherit stocks, bonds, or a savings account, any income earned after the inheritance date must be included in your taxable income.
  • Rental Income: If you inherit a rental property, the income generated by the property is subject to income tax.
  • Retirement Accounts: Special rules apply to inherited retirement accounts like traditional IRAs or 401(k)s. Distributions from these accounts are typically taxable to the beneficiary.

To avoid surprises, keep accurate records of any income produced by inherited assets.

Estate Taxes and Your Responsibility

Estate taxes are paid by the estate of the deceased, not by the beneficiary. These taxes apply only to estates exceeding the federal estate tax exemption, which is $13.99 million in 2025. Most estates fall below this threshold, so estate tax concerns are uncommon for the majority of heirs.

We also have a state-level estate tax in the state of Connecticut, and the exclusion mirrors the federal exclusion.

Capital Gains on Inherited Property

Inherited property receives a stepped-up basis for tax purposes. This means the value of the property is adjusted to its fair market value at the time of the original owner’s death.

If you sell the property later, you’ll pay capital gains tax only on the amount the property’s value increases after the inheritance date.

For example, if you inherit stock worth $400,000 and sell it for $450,000 a year later, you would owe capital gains tax on the $50,000 increase in value.

Keeping Records to Avoid Issues

To ensure compliance, keep thorough records of all inherited assets. Documentation should include:

  • The fair market value of assets at the time of inheritance
  • Any income generated from inherited property
  • Any sales or transactions involving inherited assets

Having detailed records simplifies tax reporting and minimizes the risk of errors.

When to Seek Professional Guidance

Inheritance-related tax issues can be complex, especially if you’re dealing with high-value assets, foreign inheritances, or intricate estate plans. While the general rules are straightforward, exceptions and unique circumstances might apply to your situation.

If you’re uncertain about your obligations, consulting a licensed attorney who can provide clarity and help you avoid costly mistakes.

Final Thoughts

Inheriting assets can be life-changing, but it’s essential to understand the tax implications. While the inheritance itself is not taxable, income generated from inherited assets must be reported to the IRS.

Staying informed and maintaining accurate records ensures you remain compliant and avoid unexpected liabilities. By taking the time to understand your responsibilities, you can navigate the complexities of inheritance taxes with confidence.

We Are Here to Help!

Our firm can help you create a well-rounded estate plan that covers all of your bases effectively. You can schedule a consultation at our Westport or Glastonbury, CT estate planning offices by calling us at 860-548-1000, and you can use our contact form to send us a message.

 

Barry D. Horowitz, Estate Planning Attorney
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