Beneficiaries usually do not pay federal income tax on inherited bank account money itself
The money you inherit from a bank account is not taxable income to you under federal law. When a bank account owner dies and names you as a beneficiary, the funds transfer to you tax-free. The estate itself may owe taxes on the account's value, but that liability falls on the estate, not on you as the person receiving the money.
However, any interest or earnings the account generates after you inherit it are taxable to you. If the inherited account earns $200 in interest over the next year, you report that $200 as income on your tax return. The original inheritance amount stays tax-free; only new earnings count as your income.
State taxes vary. Most states do not tax inheritances, but a small number—currently Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—impose an inheritance tax on certain beneficiaries. The rate and who pays depend on your relationship to the deceased. A spouse or child typically pays nothing or a lower rate; more distant relatives or unrelated beneficiaries may owe tax. Check your state's revenue department website to confirm whether your state taxes inheritances.
Key Takeaways
- The inherited bank account balance itself is not taxable income to you, regardless of the amount.
- Interest, dividends, or other earnings the account generates after you inherit it are taxable to you and must be reported on your tax return.
- Six states currently impose an inheritance tax, but the rate depends on your relationship to the deceased person.
- The estate may owe federal estate tax if the total estate value exceeds the federal threshold, but that debt does not transfer to you as a beneficiary.
When the estate owes federal estate tax
Federal estate tax applies only to very large estates. For 2024, the federal estate tax exemption is $13.61 million per person. If the total value of everything the deceased owned—real estate, investments, bank accounts, life insurance, vehicles—falls below that threshold, no federal estate tax is owed. Most estates do not reach this amount.
If the estate does owe federal estate tax, the executor or estate administrator pays it from the estate's assets before distributing money to beneficiaries. You do not receive a bill for it. The tax reduces the total amount available to distribute, but it does not become your personal tax liability.
The federal exemption changes yearly and is set to drop significantly in 2026 unless Congress acts. If you are inheriting from a very wealthy person, the executor should consult a tax professional about whether the estate will owe federal tax.
How to report inherited account earnings on your tax return
When you file your tax return for the year you inherited the account, you do not report the inheritance itself. You report only the interest or earnings that account generated during that tax year.
The bank will send you a Form 1099-INT (for interest) or Form 1099-OID (for original issue discount) if the account earned more than $10 in interest during the year. You receive this form by January 31 of the following year. Report the amount shown on the form on Schedule 1 (Other Income) of your Form 1040.
If the inherited account is an IRA or other retirement account, the rules are different and more complex. Inherited IRAs have required withdrawal rules that trigger taxable income. Consult a tax professional if you inherit a retirement account.
What happens if the account had a payable-on-death designation
Many bank accounts allow the owner to name a payable-on-death (POD) beneficiary directly on the account. When the owner dies, the money passes to that beneficiary outside of probate. This does not change the tax treatment: the inherited amount is still not taxable to you.
POD accounts are simpler than going through probate because the bank transfers the money directly to the named beneficiary once it receives a death certificate. You do not have to wait for a court process or for an executor to distribute funds. The tax rules remain the same regardless of how the money reaches you.
State inheritance tax rates and who pays
| State | Spouse | Child | Other Relatives | Unrelated |
|---|---|---|---|---|
| Iowa | Exempt | Exempt | 5–15% | 10–18% |
| Kentucky | Exempt | Exempt | 4–16% | 6–16% |
| Maryland | Exempt | Exempt | Exempt | 10% |
| Nebraska | Exempt | Exempt | 13–18% | 18% |
| New Jersey | Exempt | Exempt | 11–16% | 15–16% |
| Pennsylvania | Exempt | Exempt | 4.5–15% | 15% |
These rates apply only if you live in one of these six states and the deceased person lived there or owned property there. If you live in a state with no inheritance tax, you owe nothing to your state, even if the deceased lived in an inheritance-tax state.
The tax is usually paid by the estate before funds are distributed to you, though in some cases the beneficiary is responsible for paying it. Ask the executor or estate administrator which applies to your situation.
Inherited retirement accounts have different rules
If the bank account you inherited is actually an IRA, 401(k), or other retirement account, the tax treatment is completely different. These accounts have required minimum distribution (RMD) rules that force you to withdraw money over time, and those withdrawals are taxable income to you.
The rules depend on your relationship to the deceased and when they died. A surviving spouse can roll the account into their own IRA and delay withdrawals. A non-spouse beneficiary must begin taking distributions within a set timeframe, usually by December 31 of the year following the death. Each withdrawal is taxable as ordinary income.
If you inherit a retirement account, do not move the money without consulting a tax professional or the account custodian. A wrong move can trigger unexpected taxes and penalties.
Frequently Asked Questions
Do I have to report the inherited money to the IRS?
No. You do not report the inheritance itself on your tax return. You report only the interest or earnings the account generates after you inherit it. The bank and the IRS already know about the inheritance through the estate's tax filings, so you do not need to notify them separately.
What if the person who died owed income taxes?
The deceased person's final tax return is filed by the executor or administrator, and any taxes owed come from the estate's assets. You do not inherit the tax debt. However, if you inherit property or accounts that generate income, you are responsible for taxes on that new income going forward.
Can I avoid taxes by not touching the inherited account?
You still owe tax on interest the account earns, even if you do not withdraw it. The bank reports the interest to the IRS, and you must report it on your tax return. The only way to avoid the tax is to spend the interest or transfer it out, but that does not eliminate the tax obligation.
Do I need to file a separate return for the inherited account?
No. Report the inherited account's earnings on your regular personal tax return. If the account is very large or generates significant income, the executor may file a separate estate tax return (Form 1041), but you still report your share of the earnings on your own return.
What if I inherit a joint bank account?
If the account was owned jointly and you were already a joint owner, the money passes to you outside of probate and is not taxable. If you were named as a beneficiary but were not a joint owner, the inheritance rules apply: the inherited amount is not taxable, but future earnings are.