What Every Widow Should Know About the Taxes on Inherited Assets
Heather Gardner, CFP® | Wealth Advisor
After the death of a spouse, there’s a lot to absorb — emotionally and financially. In the middle of paperwork, phone calls, and decisions, it’s very common to wonder:
“Am I going to owe taxes on what I just inherited?”
The answer is different depending on the type of asset and depends on your individual circumstances. Tax rules are complex and subject to change, and understanding those differences among asset types can help you to make informed decisions.
Below is a general educational guide to how some commonly inherited assets are taxed. This is not tax or legal advice; widows should consult a qualified professional regarding their specific situation.
Life Insurance Proceeds: Typically Tax-Free
For many widows, life insurance provides critical financial breathing room — and fortunately, is generally received without an income tax bill.
Life insurance proceeds paid to a beneficiary are generally not taxable as income. You receive the death benefit in full.
A few things to keep in mind:
- The payout itself is not taxable
- Any interest earned if the insurance company holds the funds may be subject to income tax
- Estate taxes are a separate issue and affect only very large estates (based on federal and applicable state rules)
For most widows, life insurance money is available to use upon payment and is generally income-tax free.
Retirement Accounts: Taxable When You Take the Money Out
Retirement accounts are often the most misunderstood inherited assets.
Examples include:
- Traditional IRAs
- 401(k) and 403(b) plans
- SEP and SIMPLE IRAs
These accounts are not immediately taxed upon inheritance, but they may be taxed when you withdraw money from them.
Inherited retirement accounts:
- Are taxed at ordinary income tax rates, not capital gains rates
- Increase your taxable income in the year you take a distribution
- Can affect your tax bracket, Medicare premiums, and other benefits
Because of this, how much you withdraw and when you withdraw it can affect your overall tax situation— especially in the years immediately following your spouse’s death.
Investment Accounts and Real Estate: The Step-Up in Basis Advantage
Non-retirement assets often receive the favorable tax treatment.
This includes:
- Brokerage accounts (stocks, bonds, mutual funds, ETFs)
- Real estate, including your home or rental property
These assets generally receive a step-up in cost basis.
What does that mean?
The cost basis is what was originally paid for an asset. Capital gains tax is based on how much the asset has increased in value over time.
When you inherit an asset:
- Its cost basis is “stepped up” to its value on the date of your spouse’s death
- Prior gains during your spouse’s lifetime are wiped out for tax purposes
Example:
Your spouse bought stock for $40,000 years ago. At the time of death, it was worth $180,000.
Your new cost basis becomes $180,000.
If you sell it for $185,000, you generally owe capital gains tax only on the $5,000 increase — not the $145,000 of prior growth.
The same concept applies to real estate, which can make selling inherited property more tax-efficient depending on market conditions and tax rules.
At-a-Glance: How Inherited Assets Are Taxed
| Type of Asset | Tax Treatment | When Taxes Apply |
| Life Insurance Proceeds | Generally income-tax free | No income tax upon receipt |
| Inherited Retirement Accounts (IRAs, 401(k)s) | Taxed as ordinary income | When funds are withdrawn |
| Investment Accounts (Stocks, Mutual Funds) | Step-up in basis | Capital gains tax on post-death appreciation |
| Real Estate | Step-up in basis | Capital gains tax on post-death appreciation |
Why This Knowledge Matters for Widows
In the months and years after a loss, financial decisions are often made during a period of emotional exhaustion. Knowing which assets:
- Are typically tax-free
- Can trigger income taxes
- Receive favorable tax treatment
can help you avoid unexpected tax bills and make more confident choices.
There is no requirement to “do everything at once.” Taking time to understand your options — especially before selling assets or taking large withdrawals — may help you make more informed decisions.
This material is for general informational purposes only and is not intended as tax, legal, or investment advice. Tax laws are subject to change and may affect each person’s individual situation differently. Clients should consult a qualified tax professional or attorney regarding their specific circumstances.
