When it comes to your federal taxes, the IRS will not categorize your inheritance as income -- so you won't have to report it as such. However, some kinds of inheritances will generate income, and the IRS may consider this income to be taxable.
Let's say you receive an IRA or a 401(k) account following the death of your parent. When you take distributions from this account, they could be taxed. Also, if you receive appreciable assets -- like property, stocks or expensive works of art -- you may need to pay off the capital gains taxes that trigger when you sell the property.
Imagine that you father's investment portfolio is valued at $800,000 when you inherit it. However, 10 years later, you decide to liquidate the investments for $1,500,000 after they've appreciated considerably in value. You will need to pay capital gains taxes on this appreciation upon selling the assets. Every state has its own tax rules, so depending what state you live in, you may need to pay state income taxes in addition to federal income taxes upon the sale of property that has appreciated in value.
Are you concerned about your potential tax liabilities relating to inherited property you received following the death of a loved one? A Tennessee probate and estate administration lawyer can offer you guidance on your tax liabilities relating to your inheritance. Also, an estate attorney can assist you in planning your estate in such a way that will reduce the potential tax liabilities that could be experienced by your family members and/or heirs.
Source: MarketWatch, "You may owe taxes on an inheritance," Tina Orem, Sep. 06, 2017