In most cases, you do not have to pay taxes on an inheritance at the federal level. Federal law excludes the value of inherited money and property from your gross income, so the inheritance itself is not something you report on your tax return. The tax questions that do come up are separate: five states tax heirs directly, income produced by inherited assets is taxable, inherited retirement accounts carry their own rules, and estates above $15 million in 2026 pay a federal estate tax before anything reaches you.
Federal Income Tax Does Not Apply to the Inheritance Itself
Under the Internal Revenue Code, property you receive by bequest, inheritance, or devise is not part of your gross income.1Office of the Law Revision Counsel. 26 U.S. Code 102 – Gifts and Inheritances Whether you inherit cash, a house, stock, or personal belongings, you do not report the value on your personal return. The IRS treats the transfer as a shift of capital, not as income you earned.
One limit matters. The exclusion covers the inheritance, not the income it later produces.1Office of the Law Revision Counsel. 26 U.S. Code 102 – Gifts and Inheritances Interest on an inherited bank account, dividends from inherited shares, and rent from an inherited property are taxable in the year you receive them, the same as any other interest, dividends, or rent.
The Estate Pays Federal Estate Tax, Not You
The federal estate tax is charged to the estate before anything is distributed. The executor values the deceased person’s assets, subtracts debts and deductions, and pays any tax from the estate. Beneficiaries receive what remains.
For 2026, the basic exclusion amount is $15,000,000 per individual, up from $13,990,000 in 2025.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill Estates below that threshold owe no federal estate tax, and every dollar passes to beneficiaries free of federal tax. The One, Big, Beautiful Bill made the higher exemption permanent and indexed it to inflation.3Internal Revenue Service. Estate and Gift Tax FAQs Amounts above the exemption face a top marginal rate of 40 percent.4Internal Revenue Service. Estate Tax
Five States Tax the Person Who Inherits
A separate state-level tax, the inheritance tax, is charged to the beneficiary rather than the estate. Five states impose one:
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
Iowa repealed its inheritance tax effective January 1, 2025.
These taxes apply based on where the deceased lived or where their real property was located, so you can owe a state inheritance tax even if your own state does not have one. Surviving spouses are exempt in all five states. Close family typically pays little or nothing, and rates climb steeply for siblings, more distant relatives, and unrelated beneficiaries.
Pennsylvania applies flat rates by relationship: 0 percent for surviving spouses, 4.5 percent for children and other direct descendants, 12 percent for siblings, and 15 percent for everyone else.5Pennsylvania Department of Revenue. Inheritance Tax Kentucky exempts spouses, parents, children, grandchildren, and siblings entirely and taxes more distant relatives at 4 to 16 percent.6Kentucky Department of Revenue. Inheritance and Estate Tax Nebraska exempts close relatives on the first $100,000 and taxes amounts above that at 1 percent, with an 11 percent rate for more distant relatives and up to 15 percent for unrelated heirs. New Jersey exempts spouses, domestic and civil union partners, children, grandchildren, parents, and grandparents; siblings get a $25,000 exemption and then face 11 to 16 percent; unrelated beneficiaries pay 15 to 16 percent with no meaningful exemption.
Maryland is the only state that charges both an estate tax and an inheritance tax. Spouses and direct family members are exempt from the inheritance tax, and any inheritance tax paid is credited against the state estate tax bill to prevent double taxation.7Comptroller of Maryland. What You Need to Know About Maryland’s Estate Tax
Each of these states requires a specific inheritance tax return, generally due within nine months of the death. Late filing adds interest and penalties.
Some States Also Have Their Own Estate Tax
Twelve states and the District of Columbia impose a state estate tax on top of the federal one, and their thresholds are much lower. They range from $1 million in Oregon to more than $13 million in Connecticut, with Massachusetts at $2 million and many states falling between $2 million and $7 million. An estate worth $3 million owes nothing federally but could face a state estate tax in roughly a dozen states. As with the federal version, the estate pays this tax, not the heirs.
Selling Inherited Property: Stepped-Up Basis
Inheriting property is not a taxable event, but selling it later can be. Heirs get a stepped-up basis: your cost basis in an inherited asset is its fair market value on the date of death, not what the deceased originally paid.8Internal Revenue Service. Gifts and Inheritances All the appreciation that built up during the deceased person’s lifetime disappears for tax purposes.
If a parent bought a house for $150,000 and it was worth $400,000 when they died, your basis is $400,000. Sell it soon after for $400,000 and you owe no capital gains tax. You would owe capital gains tax only on appreciation above $400,000 that accumulated after the inheritance.
Inherited Retirement Accounts Are Taxed Differently
Traditional IRAs and 401(k) plans follow separate rules that can produce a real tax bill. The original owner never paid income tax on the money inside the account, so the IRS collects that tax when a beneficiary withdraws it.
A surviving spouse can roll the inherited account into their own IRA and use the standard withdrawal rules on their own timeline. Non-spouse beneficiaries generally must empty the inherited account within ten years of the original owner’s death.9Internal Revenue Service. Retirement Topics – Beneficiary Limited exceptions apply for minor children of the deceased, disabled or chronically ill individuals, and beneficiaries who are not more than ten years younger than the original owner.
If the original owner had already begun required minimum distributions before death, you generally must keep taking annual withdrawals during the ten-year window rather than waiting until year ten. If they had not yet started, you have more flexibility on timing within the ten years.
Every dollar withdrawn from an inherited traditional IRA or 401(k) is taxed as ordinary income. Federal rates for 2026 range from 10 to 37 percent depending on your total taxable income.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill A single large withdrawal can push you into a higher bracket, so spreading distributions across multiple years often reduces the total tax.
Inherited Roth IRAs follow the same ten-year rule for non-spouse beneficiaries, but withdrawals are generally tax-free because the original owner already paid income tax on the contributions.
Life Insurance Proceeds
Life insurance benefits paid to a named beneficiary are not included in gross income and do not need to be reported on your tax return.10Internal Revenue Service. Life Insurance and Disability Insurance Proceeds If the insurer holds the proceeds and pays interest on them before releasing the money, that interest portion is taxable, but the principal is not.
One narrow exception: if the policy was transferred to you in exchange for payment before the insured died, the tax-free amount is limited to what you paid for the policy plus any premiums you covered afterward. When you were simply named as a beneficiary, the full payout arrives tax-free.
Inheritances From Abroad
A U.S. person who receives an inheritance from a foreign estate has a reporting duty even when no tax is owed. If the total received from a nonresident alien or foreign estate exceeds $100,000 in a single tax year, you must report it on Form 3520, and each individual gift or bequest over $5,000 inside that total has to be separately identified.11Internal Revenue Service. Large Gifts or Bequests From Foreign Persons
The inheritance itself is still excluded from your income under the same rules that apply to domestic inheritances. The form is informational. Penalties for not filing it are not: the IRS charges 5 percent of the gift’s value for each month the failure continues, up to 25 percent.12Internal Revenue Service. Instructions for Form 3520 On a large foreign inheritance, that can reach tens of thousands of dollars.