The Internal Revenue Service (IRS) doesn’t impose an inheritance tax, at least not on the inheritance itself. You can receive a money market account free of charge, but even if you empty the account immediately and stash the cash in your freezer, taxes will eventually take a bite. When the taxation begins depends on when you receive the account.
Depending on whether you inherit a money market account or a money market fund, it’s going to generate either interest or dividends. Both are income to you and you must report them on your tax return -- but this doesn’t necessarily begin with the date of the deceased’s death. Unless you receive the money market as a payable-on-death account, the fund or account will most likely pass through the probate process before it gets to you. If the asset goes through probate, you generally don’t have to report any interest or dividends earned until the executor of the estate actually transfers the account into your name when he closes the estate.
The Estate’s Income
A gray area sometimes exists regarding when the interest or dividends actually accrued. If they accrued but didn’t pay out before the date of the deceased’s death, the executor of the estate will report them on the estate's income tax return. This is income in respect of a decedent. The same principle applies to payable-on-death accounts. If the asset doesn’t have to go through probate because it’s already assigned to you by contract with the banking institution or the financial institution, any interest or dividends earned before the date of death are the responsibility of the deceased’s estate, regardless of when they pay out. They are also income in respect of a decedent.
How to Report the Income
Money market funds do not generate interest; they generate dividends. They’re available through investment or brokerage firms, not through banks. Report dividends on Line 9a or 9b of your 1040 tax return. If you inherit a money market account with a bank, report the interest on Line 8a of your return.
Although the federal government does not impose an inheritance tax on the value of the money market you receive, states have their own tax laws. Kentucky, Nebraska, Pennsylvania, New Jersey, Maryland, Indiana, Tennessee and Iowa levy inheritance taxes. Depending on your degree of kinship with the deceased, you may have to pay a percentage of the value of the money market if you inherit it in one of these states.