In most cases, an inheritance is not taxable to the person who receives it. The federal government does not treat inherited cash, property, or life insurance proceeds as income, so the question of whether an inheritance is taxable usually comes down to a few specific situations: inherited retirement accounts, gains when you sell inherited property, a handful of states that tax heirs directly, and large transfers from foreign sources that must be reported even when no tax is owed.1Internal Revenue Service. Gifts and Inheritances
Cash and Most Property Are Not Income to You
Most inherited cash, personal property, and life insurance proceeds are not considered taxable income by the IRS.1Internal Revenue Service. Gifts and Inheritances You do not report a cash inheritance or life insurance payout on your income tax return, and you do not file a federal return simply because you received one.
The exception is income the deceased person earned but never paid tax on, known as income in respect of a decedent (IRD). IRD keeps the same character it would have had for the deceased: if it would have been ordinary income to them, it is ordinary income to you.2Internal Revenue Service. Publication 559, Survivors, Executors, and Administrators Common examples include:
- Traditional IRA and 401(k) distributions, because the original owner contributed pre-tax dollars
- Unpaid wages, bonuses, and commissions paid out after the death
- Interest and dividends earned before the death but received afterward
Federal income tax rates on this income range from 10 percent to 37 percent depending on your total taxable income for the year.3Internal Revenue Service. Federal Income Tax Rates and Brackets
Inherited Retirement Accounts
Inherited traditional IRAs and 401(k)s are the most common way an ordinary heir ends up with a tax bill. If the original account holder died after December 31, 2019, most non-spouse beneficiaries must withdraw the entire balance within 10 years of the owner’s death.4Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Every dollar you pull from a traditional account counts as ordinary income in the year you take it, and large distributions can push you into a higher bracket.
A few beneficiaries are exempt from the 10-year rule and can instead stretch distributions over their own life expectancy: surviving spouses, minor children of the deceased (until they reach the age of majority), disabled or chronically ill individuals, and beneficiaries who are no more than 10 years younger than the deceased. Surviving spouses also have the option of rolling the inherited IRA into their own account and delaying distributions until their own required beginning date.5Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
Inherited Roth IRAs follow the same 10-year timeline for most non-spouse beneficiaries, but qualified distributions are tax-free because the original owner already paid tax on the contributions. If the Roth account meets the five-year holding requirement, the withdrawal comes out without income tax even under the 10-year rule.2Internal Revenue Service. Publication 559, Survivors, Executors, and Administrators
Selling Inherited Property
If you sell inherited property, you may owe capital gains tax on any increase in value after the original owner’s death. The key protection for heirs is the stepped-up basis: inherited assets receive a new tax basis equal to their fair market value on the date of death, not whatever the deceased originally paid.6Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
This wipes out tax on appreciation during the deceased person’s lifetime. If a parent bought a house for $50,000 decades ago and it was worth $500,000 at their death, your basis is $500,000. Sell it for $510,000 and you owe capital gains tax only on the $10,000 gain, not on the $450,000 the home appreciated over the parent’s lifetime.
To establish the stepped-up basis, you generally need a professional appraisal or other documentation of the property’s fair market value as of the date of death. For publicly traded securities, the closing price on the date of death typically serves as the basis.1Internal Revenue Service. Gifts and Inheritances
Federal law also treats inherited property as a long-term capital asset no matter how long you actually hold it. Even if you sell the day after you receive it, any gain qualifies for the lower long-term capital gains rates.7Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property You never pay the higher short-term rates on inherited assets.
For 2026, the long-term rates are:
- 0 percent for lower-income taxpayers (single filers with taxable income up to $49,450; married filing jointly up to $98,900)
- 15 percent for most middle- and upper-income taxpayers
- 20 percent for high-income taxpayers (single filers above $545,500; married filing jointly above $613,700)
State Inheritance Tax
Five states tax heirs directly through an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa previously had one but fully repealed it for deaths occurring on or after January 1, 2025. Unlike the federal estate tax, this tax is assessed against you, the person receiving the assets, rather than the estate.
What you owe usually depends on your relationship to the deceased. Surviving spouses are exempt in all five states, and close relatives such as children and grandchildren receive large exemptions or reduced rates. More distant relatives and unrelated beneficiaries pay higher rates. In Pennsylvania, transfers to direct descendants are taxed at 4.5 percent, transfers to siblings at 12 percent, and transfers to unrelated heirs at 15 percent.8Department of Revenue | Commonwealth of Pennsylvania. Inheritance Tax Nebraska recently reduced its rates and increased exemption amounts for certain relatives.
Deadlines are short. Pennsylvania’s tax is generally due within nine months of the death, with a 5 percent discount if paid within three months.8Department of Revenue | Commonwealth of Pennsylvania. Inheritance Tax Each state has its own return and timing rules, so if you inherit from someone who lived in one of these five states, check that state’s revenue department promptly. In the other 45 states, no inheritance tax applies to you as the recipient.
Estate Taxes Come Out Before You Receive Anything
Federal and state estate taxes are worth understanding because they can reduce what actually reaches you, but they are not something you file or pay as an heir. The estate’s executor calculates the tax against the total estate and pays it from estate funds before distributing assets.9Internal Revenue Service. Estate Tax
At the federal level, the basic exclusion amount is $15 million per person for 2026, up from $13.99 million in 2025 after the One, Big, Beautiful Bill Act was signed into law on July 4, 2025.10Internal Revenue Service. What’s New — Estate and Gift Tax Estates below $15 million owe no federal estate tax. Above it, the top rate is 40 percent on the amount over the exemption.
About a dozen states and the District of Columbia impose their own estate taxes with much lower thresholds. Oregon starts at just $1 million, Massachusetts at $2 million, and Washington at roughly $2.2 million. Several other states fall between $3 million and $7 million. Maryland is the only state that imposes both an estate tax and an inheritance tax. A mid-sized estate that owes nothing federally can still owe a state estate tax, which the executor pays before beneficiaries are paid.
Inheritances From Foreign Sources
Receiving an inheritance from a foreign estate or a nonresident alien triggers a reporting obligation that many heirs miss. When the total from a foreign person or estate exceeds $100,000 in a single tax year, you must report it on Part IV of IRS Form 3520.11Internal Revenue Service. Gifts From Foreign Person This is an information return. It does not make the inheritance itself taxable. The IRS simply requires disclosure of large transfers from foreign sources.
The penalties for failing to file are severe. The initial penalty is the greater of $10,000 or 35 percent of the reportable amount. If you still do not file after the IRS sends a notice, an additional $10,000 penalty accrues for every 30-day period (or fraction of one) that passes after the 90-day deadline in the notice.12Internal Revenue Service. Failure to File the Form 3520/3520-A Penalties On a $500,000 foreign inheritance, the initial penalty alone could reach $175,000. A reasonable-cause exception exists, but the IRS applies it narrowly, and restrictions imposed by a foreign country’s privacy laws do not qualify.