Do Children Pay Inheritance Tax? Five States, IRAs, and Basis

In most cases, children do not pay inheritance tax on money or property they receive from a parent. There is no federal inheritance tax, and only five states tax inheritances directly — with children getting the most favorable treatment in every one of them. Where children actually end up owing money to the IRS is on inherited retirement accounts like traditional IRAs and 401(k)s, because every dollar withdrawn counts as ordinary income to the person taking it out.

No Federal Inheritance Tax Exists

The federal government does not tax people who receive an inheritance. It taxes large estates, and that is a different bill paid by a different party. The executor calculates the federal estate tax against everything the deceased owned and pays it out of estate funds before distributing anything to heirs.1Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax A child who receives $500,000 from a parent’s estate never writes a check to the IRS for estate tax. If any was owed, it already came out of the estate.

For 2026, the federal estate tax exemption is $15 million per person, raised and made permanent by the One Big Beautiful Bill Act signed on August 4, 2025.2Internal Revenue Service. What’s New — Estate and Gift Tax Married couples can shield up to $30 million between them. Fewer than one percent of estates owe anything, so for most families this whole layer is theoretical.

Five States Tax Children Directly, But Barely

Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania tax the person who receives the inheritance rather than the estate itself. Iowa repealed its inheritance tax effective January 1, 2025. In every one of these states, children get the best treatment on the schedule:

Pennsylvania and Nebraska are the only two states where a child can end up with a real bill. A child inheriting $500,000 in Pennsylvania would owe $22,500. Payment is due nine months after the date of death in Pennsylvania, and unpaid inheritance tax can become a lien on the inherited property, blocking any sale or refinancing until it’s cleared.7Pennsylvania Department of Revenue. Inheritance Tax

If the parent lived in any state other than these five, no state inheritance tax applies to the child at all.

Inherited Retirement Accounts Are Where Children Actually Pay Tax

Traditional IRAs, 401(k)s, and similar accounts never had income tax paid on the contributions. When the parent dies and the child inherits the account, that unpaid tax bill effectively transfers with the money. Every distribution the child takes counts as ordinary income on their federal return.

Under the SECURE Act’s 10-year rule, most adult children who inherit a retirement account must empty it by December 31 of the tenth year after the parent’s death.8Internal Revenue Service. Retirement Topics – Beneficiary Whether the child must take annual withdrawals during those ten years depends on the parent’s age at death. If the parent had already started taking required minimum distributions, the child must take annual withdrawals in years one through nine and clear the balance in year ten. If the parent died before reaching that age, the child can time withdrawals more freely within the ten years, but the account still has to be empty by the deadline.

The tax hit adds up quickly. A child who inherits a $500,000 traditional IRA and spreads withdrawals evenly across ten years adds $50,000 to their taxable income every year. For a working adult already earning a salary, that extra income can push them into a higher bracket. Timing withdrawals to fall in lower-income years is one of the few ways to manage the total tax bill.

Missing a required distribution triggers a penalty of up to 25 percent of the amount that should have come out, reduced to 10 percent if the child corrects the error promptly. There is no early withdrawal penalty on inherited IRA distributions regardless of the child’s age.8Internal Revenue Service. Retirement Topics – Beneficiary

Inherited Roth IRAs follow the same 10-year timeline, but distributions of both contributions and earnings are generally tax-free as long as the account was open for at least five years before the parent’s death.8Internal Revenue Service. Retirement Topics – Beneficiary Inheriting a Roth instead of a traditional IRA of the same size can save a child tens of thousands of dollars.

Selling Inherited Property and the Step-Up in Basis

Inherited real estate, stocks, and other appreciated assets get a fresh tax basis equal to the fair market value on the date of death. This step-up wipes out any capital gains that built up during the parent’s lifetime.9Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent

Say a parent bought a home for $120,000 in the 1980s and it’s worth $650,000 when they die. The child’s basis becomes $650,000. Sell for $650,000 and there is no capital gain to tax. Sell later for $720,000 and the child owes capital gains tax only on the $70,000 of appreciation that occurred after the inheritance, not on the $530,000 that accrued over the parent’s lifetime.

Retirement accounts do not get a step-up. They are classified as income in respect of a decedent and get taxed as ordinary income when the child takes distributions, as described above.

Documentation matters. The IRS wants evidence of fair market value at the date of death, typically a formal appraisal for real estate or account statements for financial assets. Without those records, a child selling later may end up paying capital gains tax calculated from the parent’s original purchase price. Basis records should be kept for at least three years after filing the return that reports the sale, though keeping them indefinitely is safer if the child plans to hold the property for years.10Internal Revenue Service. Topic No. 305, Recordkeeping

State Estate Taxes Can Quietly Shrink What You Receive

About a dozen states and the District of Columbia have their own estate tax, paid by the estate before distribution. The child never sees the bill, but the inheritance shrinks by whatever the state takes. What makes this worth knowing is how much lower state exemption thresholds sit compared to the federal $15 million: Oregon taxes estates at $1 million and up, Massachusetts at over $2 million,11Massachusetts Department of Revenue. Massachusetts Estate Tax Guide and Washington at about $3.08 million for 2026.12Washington Department of Revenue. Estate Tax A $3 million estate is invisible to the federal system but can face a real state tax bill. A child counting on a particular inheritance figure in one of these states should ask the executor what the state estate tax will take off the top.