Inherited money is generally yours to keep, and you don't report it as earnings or any other type of income on your federal tax return. This rule applies equally to cash inheritances and life insurance proceeds. The only time you might have to report income is when you inherit an IRA or other retirement account, or when you sell inherited property.
Retirement Accounts
When you inherit a tax-deferred retirement account such as an IRA or a 401(k), in most cases you have to pay income taxes when you take the money out. Because these types of accounts were funded with tax-free dollars, they are still subject to income taxes. Roth IRAs are an exception, as the original contributions have already been taxed; but you must still report the interest portion of a Roth IRA as income. Any money you receive from a retirement account is not considered earned income, and will not help your eligibility for credits such as the Earned Income Credit.
Inherited Property
If you inherit property such as stocks and bonds, you generally don't owe any taxes. But if the property increases in value after you inherit it, and then you sell it, you may have to report the difference as income.
References
Writer Bio
Alan Sembera began writing for local newspapers in Texas and Louisiana. His professional career includes stints as a computer tech, information editor and income tax preparer. Sembera now writes full time about business and technology. He holds a Bachelor of Arts in journalism from Texas A&M University.