Do My Heirs Have to Pay Income Tax or Pay Capital Gains Tax on Their Inheritance?

Heirs generally do not have to pay income tax on their inheritance. However, if the inherited assets generate income in the future, such as dividends or interest, that income is taxable. Regarding capital gains, heirs often benefit from a "step up in basis" at the time of death. This means the value of the assets for capital gains tax purposes is adjusted to their market value at the time of the decedent’s death. If the heir sells the asset, capital gains tax would only apply to the increase in value from the time of the decedent's death to the time of sale, rather than from the original purchase price. This often reduces the capital gains tax liability for the heir. Heirs do have to pay tax on funds withdrawn from IRAs or similar qualified plans which they inherit.