Are Bequests Considered Taxable Income?

A bequest is property an individual receives from someone who has passed away. Under federal tax law, property acquired by bequest is not considered taxable income to the recipient. This means if you inherit cash, stock, or a house, you do not report it as income on your federal tax return.

However, the process is not entirely without tax consequences. The estate of the deceased may owe taxes before assets are distributed, and any income the inherited property generates after you receive it is taxable to you.

Federal Tax Implications for the Estate

The federal government imposes an estate tax on the transfer of a person’s assets after death. This tax is paid by the decedent’s estate before any assets are distributed and is calculated based on the “gross estate,” which is a valuation of everything the person owned. This includes cash, securities, real estate, and business interests.

A primary feature of the federal estate tax is its high exemption amount. For 2025, an estate is not subject to this tax unless its value exceeds $14.01 million, a figure indexed for inflation. Due to this high threshold, the tax affects a very small number of estates.

If an estate’s value exceeds the exemption, the executor must file an estate tax return within nine months of the death, though an extension is available. The tax is applied to the amount exceeding the exemption after subtracting deductions like debts and charitable contributions.

State Level Inheritance and Estate Taxes

Some states impose their own taxes on wealth transfers at death, which fall into two categories: estate taxes and inheritance taxes. A decedent’s residence and property location determine if these taxes apply.

A state estate tax is similar to the federal version, where the tax is levied on the decedent’s total estate before distribution. State-level exemption amounts are much lower than the federal exemption, so an estate could be subject to state tax even if it owes no federal tax. As of 2025, twelve states and the District of Columbia impose an estate tax.

In contrast, a state inheritance tax is paid directly by the beneficiaries. The federal government does not have an inheritance tax. Six states currently levy this tax, with rates and exemptions often depending on the beneficiary’s relationship to the decedent. Spouses are usually exempt, while close relatives pay lower rates than more distant relatives or friends.

When a Bequest Creates Taxable Income

Certain situations can create taxable income for a beneficiary. The most common is “Income in Respect of a Decedent” (IRD), which is income the deceased was entitled to but had not yet received before death. When the beneficiary receives this payment, it is taxed as income to them.

Common examples of IRD include distributions from traditional retirement accounts like a 401(k) or an IRA, on which the decedent had not yet paid income tax. Other examples are final paychecks, unpaid bonuses, and deferred compensation payments. If an estate or trust earns income and distributes it to a beneficiary, that distribution is also taxable to the beneficiary.

A bequest also leads to taxable income through earnings generated by an asset after you inherit it. For instance, if you inherit a stock portfolio, the dividends are taxable. If you inherit a rental property, the net rental income is taxable, as is interest earned on an inherited savings account or bond.

Understanding the Cost Basis of Inherited Assets

When you inherit an asset like real estate or stock, its value for tax purposes is adjusted to its fair market value on the date of the decedent’s death. This is known as a “stepped-up basis,” and it can reduce the capital gains tax you might owe if you later sell the property. Capital gains tax is calculated on the difference between an asset’s sales price and its basis.

For example, if your uncle bought stock for $10,000 that was worth $100,000 when he died, your cost basis is stepped up to $100,000. Selling it immediately for $100,000 results in no capital gain. If you later sell it for $110,000, you only pay capital gains tax on the $10,000 of appreciation that occurred after you inherited it.

This treatment is an advantage compared to receiving property as a gift during the giver’s lifetime. Gifted property uses a “carryover basis,” which is the giver’s original purchase price. In the prior example, a gifted stock would have a $10,000 basis, and a sale for $100,000 would create a $90,000 taxable gain.

In some cases, an estate’s executor can choose an “alternate valuation date,” which is six months after the date of death. This is usually done if the estate’s assets have decreased in value to reduce estate tax liability. The basis you receive as a beneficiary would then be the value on that alternate date.

Special Considerations for Foreign Bequests

Receiving a bequest from a foreign person does not change its non-taxable income status. However, the IRS has specific reporting requirements for U.S. citizens and residents who receive large gifts or bequests from non-U.S. persons. This is an information-reporting rule, but failure to comply can result in financial penalties.

If you are a U.S. person and receive a bequest from a foreign estate or a gift from a nonresident alien, you must report it if the total value exceeds $100,000 in a tax year. This reporting is done on an informational return, and you must combine all bequests from a particular foreign estate received during the year.

The penalty for failing to file this return can be up to 25% of the amount of the foreign bequest. These rules help track large wealth transfers into the U.S.