Do beneficiaries pay tax on an inheritance in the US?
Usually not at the federal level. There is no federal inheritance tax, and an inheritance is not taxable income to the recipient. Any estate tax is paid by the estate, not the beneficiary. However, a handful of states impose an inheritance tax, and inherited retirement accounts are taxed as income when withdrawn.
Which states have an inheritance tax?
As of recent years, six states levy an inheritance tax: Pennsylvania, New Jersey, Kentucky, Nebraska, Iowa (phasing out), and Maryland. Rates depend on your relationship to the deceased, surviving spouses are exempt everywhere, and close relatives (children) are often exempt or taxed at low rates, while distant relatives and non-relatives pay the most.
Is an inherited IRA or 401(k) taxable?
Yes. Traditional (pre-tax) IRAs and 401(k)s are income in respect of a decedent (IRD). As a non-spouse beneficiary you generally must withdraw the account within 10 years, and each withdrawal is taxed as ordinary income. Roth accounts are usually tax-free. This is the biggest income-tax exposure most beneficiaries face.
Do I pay capital gains on inherited property I sell?
Inherited property receives a step-up in basis to its fair market value at the date of death, so if you sell soon after, there is little or no capital gain. You only owe capital gains tax on appreciation that occurs after you inherit. This step-up is a major tax advantage of inheriting rather than receiving a lifetime gift.