If you are wondering about the tax implications of money you receive in an inheritance, you may benefit from an IRS tool that can help answer some of your questions. The tool will only go so far -- you will have to go to your attorney or accountant to get answers to specific situations, especially if you inherit a large estate subject to federal or state estate tax. Keep in mind that two types of taxes can come into play: income taxes and estate taxes.
The Interactive Tax Assistant (ITA) tool deals with income taxes. Found on the IRS webpage "Is the inheritance I received taxable?" (tinyurl.com/2m68k6a9), the tool helps a user "determine, for income tax purposes, if the cash, bank account, stock, bond or property you inherited is taxable." (Note that there is no mention of either estate or inheritance taxes.)
To test the tool, I first answered the initial questions: the tax year I was asking about (2024) and whether the inheritance was from foreign sources (no).
The tool then asks you to identify the type of property inherited, choosing from: cash, including bank accounts; stocks or bonds; property (car, home, land, collectibles); income distributed from a trust or estate (Schedule K-1); or annuity or retirement plan (IRA/Employer Plan).
Choosing "cash," "property " or "stocks or bonds" takes one to a similar answer: "The inheritance is not taxable." That is, these items are "not included in your income," but if they later produce income (through interest, dividends, a gain on the sale of stocks or bonds, or the sale or rent of property), "that income is taxable to you."
A selection of "annuity or retirement plan" brings a request to click on the ITA home link (provided at the bottom of the webpage) to choose an applicable topic under the "Retirement: Pensions, IRAs, Social Security" heading. Those topics have their own versions of the ITA tool so you can further explore possible tax issues.
Select "income distributed from a trust or estate (Schedule K-1)" and you won't get a helpful answer: "This tool cannot determine the taxability of the income you received from a trust or an estate for which you received a Schedule K-1 (Form 1041)." ITA users are referred to the instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR, which are located on the IRS website (tinyurl.com/2srnk69h).
The tool does include a disclaimer, stating that the results are based on the information provided and the answers "do not constitute written advice in response to a specific written request of the taxpayer within the meaning of section 6404(f) of the Internal Revenue Code."
As to federal estate taxes, the IRS notes on its webpage "Frequently asked questions on estate taxes" that they are due "if the gross estate of the decedent ... is valued at more than the filing threshold for the year of the decedent's death" (tinyurl.com/y4j2kft8). For 2025, the threshold is $13,990,000 ($15 million for 2026).
As for state estate taxes, 12 states and the District of Columbia impose taxes on estates exceeding certain dollar amounts, and five states have inheritance taxes, according to the American College of Trust and Estate Counsel (tinyurl.com/mrjvy84f). Maryland has both.
Using the IRS tool can help, but it won't answer all your questions. The executor of the estate will likely be working with a trusts and estates lawyer to handle the distribution of the estate, the probate process, and estate and income tax issues.
As someone who inherits, you may need a lawyer or accountant to guide you on taxation of the inheritance you receive. In the article "Dos and Don'ts When You Get an Inheritance," Jeannie Bidner, a managing director at Charles Schwab, a multinational financial services company, writes: "Even if you consider yourself financially savvy, it can be useful to have a second set of eyes on your finances." Bidner adds that you should also talk with a tax adviser (tinyurl.com/bdzxfmjw).
On another note, the 2025 national 401(k) Champion Award is open for applications. Find out details at 401kchampion.com.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION