Question

I have a question about reporting inheritance. I inherited two bank accounts and part of a mutual fund when my father died. The estate still isn’t settled, but I’ve received the money. Is inheritance taxable income?

Answer

inheritance taxRegarding your question, “Is inheritance taxable income?” Generally, no, you usually don’t include your inheritance in your taxable income. However, if the inheritance is considered income in respect of a decedent, you’ll be subject to some taxes.

What Does “In Respect of a Decedent” Mean?

Reporting inheritance income in respect of a decedent includes gross income items that would have been taxable to the deceased person. However, these items weren’t included on the final return. The items include:

  • Employee compensation
  • Bonuses
  • Qualified retirement benefits (such as a 401(k) or IRA)
  • Partnership income
  • Interest and dividends
  • Gain on sale of property occurring prior to death when funds are paid after death
  • Crops and livestock
  • Installment obligations
  • Royalties

If you received one of these as the beneficiary, you must report it as income. Report it the same way the deceased person would have reported it. If the estate is the beneficiary, income in respect of a decedent is reported on the estate’s Form 1041.

If the estate reported the income in respect of a decedent on its income tax return, you don’t need to report it as income on your income tax return.

Whether an inherited item or property is taxable will depend on if the inherited property later produces income such as interest, dividends, or rents, that income is taxable to the taxpayer who inherited the property. This includes income from property that is given to a trust or held in an estate and paid, credited, or distributed to a beneficiary.

Where to Go for More Help with Inheritance Income

If you have recently come into inheritance money and are looking for a way to maximize your tax savings, learn about ways to file with H&R Block. From in-person to virtual tax prep offerings, we’ll help you produce an accurate tax return—taking advantage of every tax credit and deduction you are entitled to.

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