Put simply, most inheritance is tax free, but the income you earn on the asset (if you sell it for example) is taxable.

Securities
A common tax break for stocks is called the step-up basis. This means if the deceased buys a stock 50 years ago for $10 a share, and dies when the stock is $100 a share, you will receive a $100 basis in the inherited stock. Essentially, the stock has been stepped up to the fair market value at the time of death. If you decide to sell the stock, your capital gain or loss would be based on the difference in value from the date of inheritance to the date of sale.

In addition, if you are a surviving spouse and you roll the deceased's retirement plan into an IRA, make sure you handle it as a direct rollover. Otherwise, you will be liable for mandatory 20% income tax withholding.

• Did You Know...?
  The IRS allows a surviving spouse who is a U.S. citizen to receive an unlimited amount of property, free from federal estate tax, known as the Unlimited Marital Deduction. However, when your spouse dies, the remaining estate is subject to estate taxes.

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