Inheritance taxes: do I owe money on what I got left?

Written and reviewed by Dr. Pat Pachciarz® · Updated October 3, 2026 · Educational, not individual advice.

Here is how the IRS and the State of Illinois treat money, property, retirement accounts and life insurance you inherit, in plain English.

What should I know first?

• The inheritance itself is generally not federal taxable income.
• Income it earns later, gains when you sell it, and pre-tax retirement withdrawals can be taxed.
• Most inherited property gets a basis equal to its value on the date of death.
• Illinois has no inheritance tax; its estate tax is paid by the estate when it is over $4 million.

Common questions

Is an inheritance counted as taxable income?

Generally, no. The IRS says money and property you receive as an inheritance are generally not included in your income. If the property later produces income, such as interest, dividends or rent, that income is taxable to you.

Sources: IRS: Gifts & inheritances · IRS: Is the inheritance I received taxable?

What is stepped-up basis on an inherited house or stock?

Your basis in most inherited property is its fair market value on the date of death. If the executor elects it on an estate tax return, the alternate valuation date is used instead. If you sell soon after inheriting, there may be little or no taxable gain. Keep the date-of-death value in your records.

Sources: IRS: Gifts & inheritances · IRS Publication 551: Basis of Assets

Is life insurance I received as a beneficiary taxable?

Generally, no. Life insurance proceeds paid to you because the insured person died usually aren't taxable income. Any interest you receive on top of the death benefit is taxable and should be reported.

Sources: IRS: Life insurance & disability insurance proceeds

Does Illinois have an inheritance tax?

No. Illinois has no inheritance tax on heirs, but it does have a state estate tax. The estate, not the person inheriting, files and pays it when the estate's gross value is over $4 million. The federal estate tax applies only to much larger estates, and it is also paid by the estate.

Sources: Illinois Attorney General: Estate taxes · IRS: Estate tax

How does DAITT® help with this?

Every engagement moves through the five DAITT® disciplines in order, so the tax, legal and investment pieces are decided together.

1. Tax Strategy and Tax Filing

   List each inherited asset with its date-of-death value before selling anything.

2. Trust Planning

   Work with the executor or trustee on what passes through the estate and what passes by beneficiary form.

3. Advanced Planning

   Decide what the money is for before it's spent or invested.

4. Debt Optimization

   Consider whether paying down high-interest debt fits the plan.

5. Private Wealth Investments

   Invest what remains to match your timeline.

How do we show our value?

We explicitly show you our value, in writing, before you hire us. If we can't find it or explicitly show you, you don't pay.

Book a Clarity Call or see your Leak Score

Sources

• IRS: Gifts & inheritances
• IRS: Is the inheritance I received taxable?
• IRS Publication 551: Basis of Assets
• IRS: Life insurance & disability insurance proceeds
• Illinois Attorney General: Estate taxes
• IRS: Estate tax

More answers

• Caregiving for aging parents: money, taxes and protecting your own future
• Trust planning and family governance: the trust, the assets and bringing the kids in
• Widowhood: money decisions in the first year after losing a spouse
• Divorce financial planning: the money questions women ask first
• QDRO and QILDRO: dividing retirement plans in an Illinois divorce
• Pre-retirement planning at 55: trust planning first, then income, health care and taxes
• Social Security for women: retirement, spousal, survivor and divorced-spouse benefits
• Medicare at 65: when to sign up and how it fits your retirement plan
• Tax strategy and tax filing for women in transition
• drpatclarity.com home

Also see drpat.co and the Pinnacle FAQ.