Is inheritance income federally taxable ?

[Marketstar · Accepted solution]

Generally, inherited property (including cash, stocks, and real estate) is not taxable or reportable on a personal1040 federal return.

However, any income earned from an inheritance such as interest, dividends, rent) or capital gains will be taxable on a federal return.

 An inheritance will be taxable if you inherit an IRA, 401(k) or other retirement account. That would be considered "income in respect of a decedent" which is earned by a deceased person prior to death. Because it was paid after death the income is taxable to the recipient in the year paid.

[TomYoung]

To clarify TurboTaxVinceL's answer:

The simple act of inheriting an an IRA, 401(k) or other retirement account is not taxable, but any distribution out of those accounts would be.

[scottinphx]

So if I ever want access to the money that was in the decedent's ira I will have to pay 40% tax on it?  Where does this $5.4 mm exclusion come into play?

[scottinphx]

So if I ever want access to the money that was in the decedent's ira I will have to pay 40% tax on it?  Where does this $5.4 mm exclusion come into play?

[TaxGuyBill]

The 40% rate is not an "income tax".  It is a separate tax if the ASSETS of the Estate are over $5.4 million (including the Lifetime Gifts of the decedent).  If the assets are below that, that tax does not apply.  Only the regular tax on INCOME (such as withdrawing from a retirement account) applies.