Do I Have to Pay Income Tax on My Inheritance?
May 29, 2025


Receiving an inheritance can be a financial blessing, but many people worry about whether they’ll have to pay taxes on what they inherit. The good news? Inheritance itself is not considered taxable income at the federal level. However, certain assets may still be subject to state inheritance tax, estate tax, or capital gains tax in Pennsylvania and beyond.

Here’s what you need to know about taxes on inherited money, property, and other assets.

Is Inheritance Considered Taxable Income?

1. Federal Income Tax on Inheritance

Under IRS rules, an inheritance is not considered taxable income. This means that whether you inherit cash, property, or investments, you generally do not need to report it as income on your federal tax return.

However, there are exceptions:

  • If you inherit an IRA, 401(k), or annuity, you may owe income tax on withdrawals.
  • If the inheritance generates interest, dividends, or rental income, that income is taxable.
  • Selling inherited property for a profit may trigger capital gains tax (more on that below).

2. Pennsylvania Inheritance Tax

Unlike federal tax laws, Pennsylvania does impose an inheritance tax on beneficiaries. The tax rate depends on your relationship to the deceased:

Beneficiary Tax Rate
Spouse & Children aged 21 and younger 0% (Exempt)
Children & Grandchildren (Direct Descendants) 4.5%
Siblings 12%
Other Heirs (Friends, Nieces, Nephews, etc.) 15%
  • Charitable organizations and government entities are exempt from inheritance tax.
  • Life insurance proceeds are not taxable under PA inheritance tax laws.

3. Do I Pay Capital Gains Tax on Inherited Property?

If you inherit a home or other real estate, you don’t owe capital gains tax immediately. However, if you sell the property, you may owe tax on any profit made.

The IRS applies a step-up in basis rule, which means:

  • The property’s value is adjusted to its fair market value at the time of the owner’s death.
  • You only pay capital gains tax if you later sell it for more than that new value.

Example:

  • Your parent bought a house for $100,000.
  • At the time of their passing, the home’s market value was $300,000.
  • If you sell it for $310,000, you only owe tax on the $10,000 gain—not the full increase from the original purchase price.

4. How to Reduce Inheritance Tax & Capital Gains Tax

If you’re planning your estate, there are ways to minimize inheritance tax and capital gains tax for your heirs:

  • Gifting assets before death (Pennsylvania does not tax gifts made more than one year before death).
  • Setting up trusts to distribute assets strategically.
  • Converting tax-heavy assets, like retirement accounts, into tax-free assets (e.g., Roth IRA conversions).
  • Working with an estate planning attorney to structure your estate efficiently.

Need Estate Planning or Tax Guidance?

Whether you’re receiving an inheritance or planning your estate, understanding tax implications is essential. At Daley Zucker, LLC, our experienced estate planning attorneys can help you reduce tax burdens and protect your assets.



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