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Do I have to report income I inherited?

It depends on whether it’s inheritance tax or estate tax. Inheritance tax and estate tax are types of death taxes.

Estate tax is imposed on:

  • The right to transfer property
  • The deceased's estate
  • The estate, not on the heirs, at both the federal and the state levels

Inheritance tax is:

  • Imposed on heirs in some states
  • Usually tied to the property recipient's relationship to the deceased. Close relatives pay a lower rate than distant relatives and unrelated parties.

The estate's executor usually pays inheritance taxes. First, the executor uses assets in the deceased's estate to pay the taxes. Then, the executor distributes the estate to the heirs. So, you usually only have to pay inheritance tax if the estate earns income before it's settled. This might occur if the deceased owned income-producing investments like:

  • Stocks
  • Rental properties
  • Bank accounts
  • Bonds

If you must pay inheritance tax, the executor usually:

  • Files an information return
  • Issues a Form K-1 to each heir. The K-1 tells you how much income you have to claim on your return.

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