In most cases, you do not pay taxes on inheritance you receive. The federal government does not tax beneficiaries for inheriting money or property, and only five states impose an inheritance tax on the person receiving assets. The important exceptions are inherited retirement accounts, which trigger income tax when you withdraw the money, and large estates that may owe federal or state estate tax before anything reaches you.
What the Federal Government Actually Taxes
There is no federal inheritance tax. What exists is a federal estate tax, and it is paid by the estate itself before assets are distributed. The executor values everything the deceased owned, subtracts allowable deductions, and pays any tax owed out of estate funds.1Internal Revenue Service. Estate and Gift Taxes
For 2026, the exemption is $15,000,000 per person.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Only the value above that threshold is taxed, and the top rate is 40 percent.3Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax The exemption is unified with the federal gift tax, so large lifetime gifts by the deceased reduce what is available at death.4Internal Revenue Service. What’s New – Estate and Gift Tax Because the threshold is so high, the vast majority of estates owe no federal estate tax at all.
A separate generation-skipping transfer tax can apply when assets pass to a grandchild or someone two or more generations below the deceased. It uses the same $15,000,000 exemption and same 40 percent top rate,4Internal Revenue Service. What’s New – Estate and Gift Tax and for most families it never comes into play.
The Five States That Tax Beneficiaries Directly
A small group of states tax the person receiving the inheritance rather than the estate. Five states currently impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa fully repealed its inheritance tax for deaths on or after January 1, 2025.
What you pay in these states depends mostly on how you were related to the deceased. Surviving spouses are exempt in all five. Children and other close relatives usually pay nothing or very little. More distant relatives and unrelated beneficiaries face higher brackets, which can reach 15 to 16 percent. Maryland is unique in imposing both an inheritance tax and a separate state estate tax, so an estate there can face two layers of state-level taxation.
If the deceased did not live in one of these states, and you did not inherit real property located in one, an inheritance tax will not follow you home to a state that does not have one.
State Estate Taxes That Shrink What You Receive
Twelve states and the District of Columbia impose their own estate tax on top of the federal system: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Like the federal version, the estate pays the tax before beneficiaries receive anything, but the exemption thresholds are much lower.
State exemptions run from about $1,000,000 in Oregon to over $13,000,000 in Connecticut, with most falling between $2,000,000 and $7,000,000. An estate that owes nothing federally can still owe a significant state estate tax. Top rates range from 12 percent to 20 percent, and Washington’s top rate reaches 35 percent on the largest estates. The state where the deceased lived, and any state where they owned real property, determines which state taxes apply.
Inherited Retirement Accounts Are the Big Exception
The one place ordinary inheritances routinely produce tax is retirement accounts. Traditional IRAs and 401(k)s hold pre-tax money, and the IRS collects income tax whenever that money comes out. Inheriting the account does not erase the tax bill; it transfers it to you.
Traditional IRAs and 401(k) Plans
Withdrawals from an inherited traditional IRA or 401(k) are taxed as ordinary income at your personal tax rate.5Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs) A large withdrawal in one year can push you into a higher bracket, so timing matters. Surviving spouses have the most flexibility: they can roll the inherited account into their own IRA, delay distributions, or take withdrawals based on their own life expectancy.6Internal Revenue Service. Retirement Topics – Beneficiary
The 10-Year Rule
Most non-spouse beneficiaries who inherit a retirement account from someone who died in 2020 or later must empty the entire account by the end of the tenth year after the year of death.6Internal Revenue Service. Retirement Topics – Beneficiary You can spread withdrawals across those years in any pattern you like, but the balance must reach zero by the deadline, and each withdrawal from a traditional account is taxable income for that year.
A narrow group of “eligible designated beneficiaries” can stretch distributions over their own life expectancy instead:
- Surviving spouses
- Minor children of the account holder (not grandchildren), until they reach the age of majority, when the 10-year clock then starts
- Disabled or chronically ill individuals as defined under the tax code
- Anyone not more than 10 years younger than the deceased account holder
Adult children, siblings, friends, and most other beneficiaries fall under the 10-year rule.6Internal Revenue Service. Retirement Topics – Beneficiary
Inherited Roth IRAs
Inherited Roth IRAs follow the same 10-year timeline for non-spouse beneficiaries, but the tax treatment is far kinder. Contributions come out tax-free. Earnings also come out tax-free as long as the original owner held any Roth IRA for at least five tax years before death.5Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs) If the account is younger than five years at the time of withdrawal, the earnings portion may be taxable.6Internal Revenue Service. Retirement Topics – Beneficiary
Inherited Real Estate and Investments Get a Basis Reset
Inherit a house, stocks, or mutual funds, and you get one of the most valuable breaks in the tax code: a stepped-up basis. The cost basis used to figure capital gains resets to the asset’s fair market value on the date of death, not what the deceased originally paid.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent
If your parent bought a house for $150,000 and it was worth $450,000 on the date they died, your basis is $450,000. Sell it soon after for $450,000 and you owe zero capital gains tax. Only the appreciation after the date of death is taxable when you eventually sell. Decades of accumulated gain can disappear in a single step.
Retirement accounts do not qualify for the step-up because they represent income that was never taxed in the first place.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent There is also an anti-abuse rule: if you gift appreciated property to someone and they die within a year, the property passes back at its original basis with no step-up. In some large estates the executor may elect to value assets six months after death instead of on the date of death,8Office of the Law Revision Counsel. 26 U.S. Code 2032 – Alternate Valuation and your basis then reflects that later value.
Life Insurance Payouts
Life insurance proceeds paid because of the insured person’s death are generally excluded from your gross income.9Office of the Law Revision Counsel. 26 U.S. Code 101 – Certain Death Benefits Lump sum or installments, the death benefit itself is not taxable to you. Two wrinkles: if you take installments that include interest, the interest portion is taxable, and if the policy was transferred to you for value before the insured died, part of the proceeds may be taxable. The payout can still count toward the deceased’s taxable estate if they owned the policy at death, which matters only for very large estates.
Inheriting From Someone Outside the U.S.
An inheritance from a nonresident alien or foreign estate is not federally taxable to you, but it can trigger a reporting requirement. When the total you receive from a foreign person or estate exceeds $100,000 in a single tax year, you must report it on Form 3520, and you must separately identify each gift or bequest above $5,000.10Internal Revenue Service. Gifts from Foreign Person
The penalties are harsh. Failure to report carries a 5 percent penalty per month on the unreported amount, up to 25 percent.11Internal Revenue Service. Instructions for Form 3520 A $500,000 unreported foreign inheritance can produce a $125,000 penalty even though the inheritance itself is not taxed. A reasonable-cause exception exists but is read narrowly.
Income Earned by the Estate Before You Receive It
If estate or trust assets earn income during administration, that income has to be reported somewhere. The executor or trustee sends you a Schedule K-1 (Form 1041) showing your share of interest, dividends, capital gains, or rental income earned by estate assets after death.12Internal Revenue Service. Schedule K-1 (Form 1041) – Beneficiary’s Share of Income, Deductions, Credits You include those amounts on your personal Form 1040.13Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 This is separate from the inheritance itself; it is tax on income the assets produced while the estate was still being administered.