Do You Declare an Inheritance on Your Income Tax Return?

Inheriting money is never the way you want to come into wealth. While it's great that your bank account is going up, it's not worth losing someone you love. After the grief of losing a loved one has worn off, you may be wondering whether you have to share any of your inheritance with Uncle Sam.

Money that you inherit isn't counted as taxable income, nor do you have to report the property that you receive on your income tax return. The Internal Revenue Service does have an estate tax, but that only hits people whose estates and taxable gifts made during their lifetime exceed a certain amount. As of 2013, that's $5.25 million, so most people aren't affected by it. Plus, the estate and not the people who inherit the assets, will file an estate tax return, if necessary, and pay any estate taxes due.

If you inherited a retirement account, such as an IRA or 401(k) plan, you do have to include distributions from those plans on your income taxes. As long as the money stays in the account, it continues to grow tax-free, just as it did before the owner died. However, any distributions are taxed the same way they would have been if the original owner had taken them. So, if the owner would have had to include distributions from his traditional IRA as taxable income on his tax return, you must do so as well.

If you sell inherited assets, those transactions might require some tax reporting on your part. Your basis is stepped up to the fair market value of the assets at the time the owner died, which can alter how much you owe. For example, say the decedent bought stock for $5,000 and it was worth $15,000 at his death. If you sell it for $16,000, you have a $1,000 gain because your basis was stepped up to $15,000. If, however, the asset is worth less when the owner died than what he paid for it, your basis goes down. So, say he paid $5,000 but it's only worth $3,000 at his death. If you sell it for $2,000, you have a $1,000 loss.

If you sell personal assets, rather than investment assets, the rules for figuring your gain or loss are the same as for investment assets. But, you can't claim a loss on the sale on your taxes. However, you still must include any gains. For example, say you inherit a car that was worth $10,000 when the owner died. If you sell it for $8,000, you can't claim the $2,000 loss. But, if you sell it for $15,000, you must include the $5,000 gain as taxable income on your return.