In most cases, estate distributions are not taxable to beneficiaries. Federal law puts the estate tax on the estate itself, and with a $15 million exemption in 2026, the great majority of estates owe nothing.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 What you receive as an heir generally arrives without a federal tax bill attached. The important exceptions are inherited retirement accounts, income the estate earns while it’s being settled, and a handful of state taxes that can apply even when no federal tax is due.
The Estate Pays Any Federal Estate Tax, Not You
Before anything reaches beneficiaries, the executor calculates the gross estate — the fair market value of everything the decedent owned at death, including real estate, investments, bank accounts, and certain life insurance proceeds — subtracts debts, funeral costs, and charitable gifts, and applies the exemption.2Internal Revenue Service. Estate Tax Only what remains above the exemption is taxable.
For 2026, that exemption is $15 million per person, an amount Congress set through legislation signed on July 4, 2025.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A married couple can shelter up to $30 million combined. If the taxable estate does exceed the threshold, rates start at 18 percent on the first $10,000 of excess and climb through a graduated schedule to 40 percent on amounts more than $1 million above the exemption.3Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
The executor pays that tax from estate assets before distributing anything. You do not receive an IRS bill for inheriting. The estate has already settled up.
When You Do Owe Income Tax on What You Inherit
Receiving an inheritance is not treated as income on your federal tax return. Cash from a savings account or a life insurance payout arrives tax-free. The main exception is a category the tax code calls income in respect of a decedent — money the deceased earned or was entitled to but never paid tax on before death. Traditional IRAs, 401(k) accounts, and deferred compensation are the common examples. When you withdraw from those inherited accounts, the IRS treats the distribution as ordinary income taxed at your rate.
Separately, an estate can earn income while it’s being administered: interest on bank accounts, dividends, rent from property held before final distribution. If the estate’s gross income exceeds $600 in any tax year, the executor files Form 1041 and typically passes the income through to beneficiaries on a Schedule K-1. You then report your share on your personal return.4Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 This tax applies only to earnings generated after the date of death, never to the underlying inheritance.
Inherited Retirement Accounts
Inherited retirement accounts are where beneficiaries most often end up with a real tax bill. The rules shifted under the SECURE Act for account owners who died in 2020 or later, and how much you owe depends on your relationship to the person who died.
Surviving Spouses
A surviving spouse has the widest choice. You can roll an inherited IRA or 401(k) into your own retirement account and delay distributions until your own required beginning date, as if you had always owned it. Or you can hold it as an inherited IRA and take distributions over your own life expectancy.5Internal Revenue Service. Retirement Topics – Beneficiary
Non-Spouse Beneficiaries and the 10-Year Rule
Most non-spouse beneficiaries who inherit a traditional IRA or 401(k) from someone who died in 2020 or later must empty the entire account by the end of the tenth year following the year of death.5Internal Revenue Service. Retirement Topics – Beneficiary Every dollar you withdraw from a traditional account counts as ordinary income in the year you take it. Waiting until year ten and pulling the whole balance at once can push you into a much higher bracket. Spreading withdrawals across the full ten years usually produces a lower total tax bill.
A narrow group of “eligible designated beneficiaries” can stretch distributions over their own life expectancy instead. That group includes minor children of the account owner (the 10-year clock starts when they reach the age of majority), disabled or chronically ill individuals, and beneficiaries no more than ten years younger than the deceased owner.6Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Inherited Roth IRAs
Inherited Roth IRAs follow the same 10-year withdrawal timeline for non-spouse beneficiaries, but the tax treatment is very different. Because the original owner already paid income tax on Roth contributions, your withdrawals of contributions and most earnings come out tax-free.5Internal Revenue Service. Retirement Topics – Beneficiary The exception: if the Roth was less than five years old at the owner’s death, withdrawals of earnings may be taxable. For most well-established Roth accounts, the whole distribution is income-tax-free.
Inherited Property Gets a Stepped-Up Basis
When you inherit real estate, stocks, or a business interest, your cost basis resets to the fair market value on the date the owner died. This step-up in basis wipes out capital gains tax on all the appreciation that built up during the decedent’s lifetime.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Say a parent bought a home for $150,000 and it was worth $550,000 the day they died. Your basis as the heir is $550,000. Sell it shortly after for $550,000 and you report zero capital gain. You only owe capital gains tax on appreciation after the date of death, meaning the difference between your eventual sale price and the stepped-up value. An appraisal or brokerage statement near the date of death documents your new basis.
Two limits are worth knowing. The step-up does not apply to income in respect of a decedent, so inherited traditional retirement accounts, unpaid wages, and similar items keep their original tax character and are taxed as ordinary income when received. And if someone gifts appreciated property to a person who then dies within one year and leaves it back to the original giver, the step-up is denied and the giver’s old basis stands.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Life Insurance Proceeds
Life insurance paid to a named beneficiary is generally income-tax-free. You do not report the death benefit as income, regardless of the amount. Life insurance can still affect the estate side: if the decedent owned the policy, meaning they held the right to change beneficiaries, borrow against it, or cancel it, the full death benefit is included in the gross estate.8Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance That can matter for a large estate near the exemption, but any resulting estate tax is paid by the estate, not by you.
State Estate and Inheritance Taxes
Federal rules aren’t the whole picture. As of 2025, twelve states and the District of Columbia impose their own estate taxes, and five states impose an inheritance tax. Maryland has both. State exemptions are often much lower than the federal $15 million — roughly $1 million to about $7.3 million depending on the state — so an estate that owes no federal tax can still face a state bill.
The two taxes work differently. A state estate tax is paid by the estate, based on total value, much like the federal tax. An inheritance tax is paid by the individual beneficiary, based on how much you receive and how closely related you were to the decedent. Spouses and children typically owe nothing or pay reduced rates; more distant relatives and unrelated beneficiaries pay more. The top inheritance rate across the states that levy one reaches 16 percent.
Which state’s rules apply turns on where the decedent lived at death and where any real estate sits. Someone who lived in a state with no estate tax but owned a vacation home in a state that has one could owe state tax on the value of that property. Because the rules vary widely, check the specific requirements of any state that might touch the estate early on. State returns are generally due within nine months of death, in line with the federal timeline.