Taxes on Inheritance: What You Should Know and How to Prepare

Receiving an inheritance can be emotional. It often comes during a difficult time, and on top of everything else, many people are left wondering: Will I owe taxes on this?

The answer depends on several factors, including where you live, the type of assets you inherit, and how the inheritance is structured. Let’s walk through the basics so you can understand what to expect and how to handle inheritance taxes with confidence.

Is Inheritance Taxable?

In most cases, inheritance itself is not taxed at the federal level for the person receiving it. However, there are important exceptions and state-level rules that can affect what you owe.

It’s also important to understand that inheritance-related taxes are not all the same. There are different types of taxes that may apply depending on the situation.

Estate Tax vs. Inheritance Tax: What’s the Difference?

These two terms are often confused, but they work differently.

Estate Tax

An estate tax is paid by the estate of the person who passed away before assets are distributed to beneficiaries. At the federal level, estate taxes generally only apply to very large estates that exceed exemption thresholds.

Some states also impose their own estate taxes.

Inheritance Tax

Inheritance tax is paid by the person receiving the inheritance. Not all states have inheritance taxes, but those that do may apply different rates depending on your relationship to the deceased.

For example, spouses and close family members often receive favorable treatment, while more distant relatives or non-family beneficiaries may face higher tax rates.

What Types of Inherited Assets May Be Taxed?

While receiving money or property itself is often not taxable income, certain inherited assets can trigger taxes later.

Inherited Retirement Accounts

Distributions from inherited IRAs or retirement plans may be taxable when you withdraw the funds, depending on the account type and your beneficiary status.

Investment Accounts

If you inherit stocks or other investments, capital gains taxes may apply when you sell them. Many inherited assets receive a “step-up in basis,” which can reduce capital gains, but it’s important to understand how this applies to your situation.

Rental or Income-Producing Property

If inherited property generates income, that income is typically taxable.

What Factors Affect Your Tax Responsibility?

Several things can influence whether you owe taxes on inherited assets:

• The state where the estate is located

• Your relationship to the person who passed away

• The type of assets inherited

• How and when distributions are received

• Your overall tax situation

Because every situation is unique, general rules don’t always tell the full story.

Why Professional Guidance Matters

Inheritance tax situations often involve multiple layers of financial and tax considerations. Without proper guidance, it’s easy to overlook reporting requirements or make decisions that create unnecessary tax consequences.

Working with a professional accounting team helps ensure:

• Income is reported correctly

• Required forms are filed properly

• Tax-saving opportunities are identified

• You stay compliant with federal and state rules

How BAS Helps You Navigate Personal Taxes

At Business Accounting Systems, PC, we help individuals navigate personal tax situations with clarity and care — including those involving inheritances.

Our team can help you:

• Understand how inherited assets affect your tax return

• Identify potential tax obligations

• Properly report income and distributions

• Plan ahead to minimize surprises

Whether your situation is simple or more complex, having experienced guidance makes a meaningful difference.

Final Thoughts

Inheritance can bring both opportunity and responsibility. While taxes may not always apply, knowing the rules and preparing properly can help you avoid confusion and unexpected costs.

If you’ve received an inheritance or expect to in the future, it’s worth having a conversation with a professional who can help you understand your options and next steps.

Ready for Personalized Tax Guidance?

If you’d like help navigating your personal taxes or understanding how an inheritance may impact your financial situation, the BAS team is here to help.

Contact Business Accounting Systems, today to get clear, confident support with your personal tax needs.