The Internal Revenue Service doesn’t count inherited money, including securities like stocks and bonds or other property, as income. You don’t have to report inheritance money on your federal tax return. An inheritance can affect your income taxes indirectly, depending on what happens to its value after you get it. There may be other tax issues you have to deal with.

Cost Basis Valuation

When someone buys stocks, real estate and other assets, they are valued at the cost of purchase, called the cost basis. When the asset is sold, you subtract the cost basis from the sale proceeds to find the taxable gain or loss that is reported on your taxes. If you inherit money in the form of such assets, IRS rules say to change the cost basis to the value of the asset on the date of death. The cost basis of inherited assets is not income and you don’t report it on your tax return. If you eventually sell the asset for a profit, the gain is taxable income and you have to report it on your tax return for the year the sale occurred.

Jointly Owned Assets

Inheritance money might come to you in the form of assets you owned jointly with the deceased. If the person who died was your spouse, in some states 50 percent of the cost basis is changed to the value on the date of death. In community property states, 100 percent of the cost basis changes to the date-of-death value. Either way, the cost basis of the property is not income, but any increase in value that occurs after you inherit the property is a taxable gain you have to report. If the deceased owner wasn’t a spouse, the cost basis attributable to his ownership share is changed to the value on the date of death.

Estate Taxes

Inheritance money may be subject to estate taxes. As an heir, you are not responsible for estate taxes because they are paid out of the estate assets before you get anything. An estate tax is levied on the net or taxable estate, which is the gross estate assets minus debts owed by the deceased, charitable bequests, the cost of administering the estate and property that goes directly to a spouse. As of 2014, the federal government collected estate tax on estate assets in excess of $5.34 million. Some states also assess estate taxes.

Inheritance Tax

Several states levy an inheritance tax, though the federal government does not. Inheritance taxes are paid by the person who is the beneficiary. Suppose you are named in a will. Estate taxes will be paid by the estate before you receive your inheritance. You are responsible for paying inheritance tax on the money you receive. Contact your state’s department of revenue to see if your state has an inheritance tax.