How Does Inheriting Money Affect Taxes?

Most inherited assets are not immediately taxable to the person who receives them — the estate pays any federal estate tax, not the heir. However, if you inherit a traditional IRA or 401(k), withdrawals are taxable as ordinary income. Inherited stocks or real estate generally get a step-up in basis to the fair market value at the date of death, which can significantly reduce capital gains taxes if you sell. A handful of states have their own inheritance taxes. Consult a tax professional if you inherit significant assets.