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Will I Owe Taxes When I Receive an Inheritance?

February 13, 2025

Will I Owe Taxes When I Receive an Inheritance?

As lawyers like to say, “it depends.” For the majority of American families, an inheritance of anything other than a retirement account comes to them tax free.

There are four types of taxation to consider: (1) final income taxes; (2) estate’s income taxes; (3) your income taxes; and (4) estate taxes.

Final Income Taxes An estate administrator or surviving spouse may need to file an income tax return for income earned during any days of the calendar year in which the deceased person was alive. This applies on the federal, state, and local level. Be sure to mark the “final” box on returns, or put in your loved one’s date of death, where applicable.

Estate/Trust Income Taxes If you received your inheritance through a probate estate or trust administration, the executor or trustee may be required to file income tax returns. An estate or trust pays taxes on income received during the time of administration. If you receive payments from the trust or estate during a calendar year, the estate/trust may issue you a Form K-1, which includes information for your income tax return.

Beneficiary/Recipient’s Income Taxes As a beneficiary, consider the following when filing your personal income tax return:

1. Retirement Accounts Did you inherit a retirement account? If your loved one contributed to that account tax-free during their lifetime, then distributions are taxed when you take the money out. Before cashing in inherited investment accounts, verify with a qualified professional whether it was a retirement account.

2. Stepped Up Basis and Capital Gains Under the laws effective as of the date of this publication, many of our assets (including our real estate and investment accounts) may get a “stepped up basis,” which may minimize your capital gains liability when you sell the asset. Talk to qualified professionals on whether your inheritance received a stepped-up basis. The future of the “stepped up basis” is often discussed in federal budget and tax bills.

3. The Estate or Trust’s Income You may receive a Form K-1 if there was a probate estate or administration. Include K-1 information on your personal income tax returns.

Federal Estate Tax

For individuals with significant wealth at death (over $13,610,000 for calendar year 2025), there may be federal estate taxes.

Special note for beneficiary’s of Medicaid recipients: For many surviving families, the bigger financial concern overshadowing potential inheritance is the Medicaid Estate Recovery Program. If Medicaid benefits covered nursing home services, there may be a “lien” on inherited assets.

This article was written by Sarah J. Corney for the Buzz Book, Spring 2025

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