It is true that receiving an inheritance brings emotional weight—and sometimes financial questions. One of the most common is whether inherited money should be reported to the IRS.
In general terms, the answer is no. It should be recognized that the inherited assets are not considered income for federal tax purposes. If someone inherits cash, stocks, property, or similar assets, the value is not reported on the federal tax return. This applies to both lump-sum distributions as well as scheduled disbursements from estates or trusts.
However, if inherited assets generate earnings later on, those amounts might become taxable as outlined below:
Let’s say someone inherits a home valued at $400,000. Selling it for $410,000 later creates a $10,000 capital gain—not on the full amount, just the difference between the stepped-up value and the sale price.
Inherited retirement accounts such as IRAs or 401(k)s come with different rules. In this scope, beneficiaries may need to take required minimum distributions (RMDs) and report them as income in the year received. The account type and relationship to the deceased, as well as the distribution schedule, influence how and when the tax applies.
It is correct that no federal inheritance tax exists in the United States. However, specific states impose separate rules. Maryland, for instance, might apply an inheritance tax—but federal reporting remains limited to earnings, not the principal.
In closing, the IRS does not tax inheritance itself, but what happens afterward can matter. For any assistance in inheritance tax, contact Watter CPA today.
