Are Inherited CDs Counted as Taxable Income?

An inherited CD increases your assets, not your taxes.
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If you receive a certificate of deposit, or CD, as an inheritance, you may have some tax concerns. Inherited assets aren’t counted as income by the Internal Revenue Service. However, CDs are interest-bearing accounts. This may create a tax issue for you along with the possibility of dealing with estate and inheritance taxes.

Taxes and Inherited CDs

Ownership of an inherited CD can pass to you in several ways. The original owner may name you as beneficiary of the account or of a living trust that holds the CD. In either case, the bank transfers ownership as soon as you provide a death certificate. If the will of the deceased lists the CD, you’ll have to wait until the will goes through probate before taking possession. That can take months or even years. In all cases, the cash value of the CD is not income for tax purposes, so you don’t report it on your tax return and you don’t pay income taxes on the money.

CD Interest Income

Only the value of an inherited CD at the time of death is excluded from income. The value is determined by calculating the worth of the CD, including accrued interest, on the date of death. At that point, the IRS views you as the new owner, and all future interest earned by the CD is income for you. Suppose you inherit a CD with a principal balance of $5,000 plus $200 in accrued interest as of the date of death. The value of your inheritance is $5,200. If the CD pays another $250 interest before it matures, this additional interest counts as income and you have to pay income taxes on those earnings.

Paying Estate Taxes

When someone dies and leaves a large enough estate, the IRS levies an estate tax. As of the time of publication, the estate tax was imposed on estate values in excess of $5.34 million. You are not responsible for the estate tax when you inherit a CD or other property. Estate taxes are paid out of the estate assets. Normally, the executor of the estate takes care of estate taxes and other obligations of the deceased before distributing the CD and other assets to the heirs.

State Inhreitance Tax

An inheritance tax, unlike an estate tax, is levied on the money and property received by a beneficiary. The federal government has no inheritance tax, but some states do. If you are liable for inheritance tax on an inherited CD, you’ll need to contact your state department of revenue for specific instructions. Sometimes the terms of a will stipulate that inheritance taxes are paid by the estate. If not, you have to pay it.

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