The tax on an inheritance depends on three things: whether the federal estate tax applies, whether the deceased’s state or your state imposes its own estate or inheritance tax, and what you do with the assets after you receive them. For most people, the answer is that nothing is owed. Federal law excludes inherited property from income, the federal estate tax only reaches estates above $15 million in 2026, and only a small group of states tax inheritances at all.
Is an Inheritance Taxable Income?
No. If you inherit cash, a house, stock, or other property, you do not report the value as income on your federal tax return. Federal law specifically excludes property acquired by bequest, devise, or inheritance from gross income.1Office of the Law Revision Counsel. 26 U.S. Code 102 – Gifts and Inheritances A $500,000 inheritance deposited into your account is not income.
Two things the inheritance itself doesn’t cover are still taxable. Anything the asset earns after you own it — rent from an inherited rental property, dividends from inherited stock — is ordinary taxable income in the year you receive it. And distributions from an inherited traditional IRA or 401(k) are taxed as ordinary income when you withdraw them, because the original owner never paid income tax on that money.
Federal Estate Tax
The federal estate tax is paid by the estate, not by heirs.2Office of the Law Revision Counsel. 26 U.S.C. 2001 – Imposition and Rate of Tax The executor totals everything the deceased owned, subtracts allowable deductions, and settles any tax owed before beneficiaries receive their shares. What you inherit is what remains after that step.
For 2026, the basic exclusion is $15 million per individual. Estates below that owe no federal estate tax.3Internal Revenue Service. What’s New – Estate and Gift Tax The exclusion was raised from roughly $14 million by the One, Big, Beautiful Bill signed on July 4, 2025, and it will be adjusted for inflation in future years.4Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
Amounts above the threshold are taxed on a graduated scale that starts at 18 percent and tops out at 40 percent on amounts over $1 million of taxable value.5Office of the Law Revision Counsel. 26 U.S. Code 2001 – Imposition and Rate of Tax The gross estate is broader than what passes through probate: life insurance payable to the estate, retirement balances, real estate, business interests, and jointly held property all count, valued at fair market value on the date of death (or an alternate valuation date the executor may elect).
The estate tax and gift tax share the $15 million exclusion. Taxable gifts made during life reduce what’s available at death. Separately, the annual gift tax exclusion lets an individual give up to $19,000 per recipient in 2026 without using any lifetime exclusion or filing a gift tax return, and gifts to a non-citizen spouse are excluded up to $194,000.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Stepped-Up Basis When You Sell
The biggest tax benefit of inheriting appreciated property is the stepped-up cost basis. When you inherit an asset, your basis for calculating capital gains resets to the fair market value on the date of the owner’s death.7Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent The step-up applies whether or not the estate files a federal estate tax return.8Internal Revenue Service. Gifts and Inheritances
Say a parent bought stock for $50,000 decades ago and it was worth $400,000 on the date of death. Your basis is $400,000. Sell it soon after for roughly that amount and you owe little or no capital gains tax. Without the step-up, you would owe tax on $350,000 of gain. Hold it and sell later, and you pay capital gains tax only on appreciation above the stepped-up value.
States That Tax the Heir
Five states impose an inheritance tax, which is paid by the person receiving the assets: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rate depends on your relationship to the deceased, and the pattern is consistent across all five:
- Spouses are exempt in every state that has an inheritance tax.
- Children and direct descendants are either exempt or taxed at low rates, roughly 0 to 4.5 percent depending on the state.
- Siblings and other close relatives generally pay somewhere between 1 and 12 percent.
- Distant relatives and unrelated heirs pay the highest rates, which can reach 15 to 16 percent.
These rates apply to what each heir receives, not to the estate as a whole. Several states also carve out a small dollar exemption — for example, the first $40,000 or $100,000 to certain relatives — before applying the percentage. What triggers the tax is the deceased’s residency or the location of real estate, not yours. If the person you inherited from lived in one of these five states, or owned real estate there, check that state’s tiers.
States That Tax the Estate
Twelve states and the District of Columbia impose their own estate tax. It works like the federal version — the estate pays before distribution — but the exemption thresholds are far lower. Some states set their exclusion as low as $1 million, so an estate that owes nothing federally can still face a substantial state bill. Rates generally run from under 1 percent up to 20 percent on a progressive scale. Maryland is the only state that imposes both an estate tax and an inheritance tax.
A few of these states use a “cliff”: if the estate exceeds the exemption by more than a set margin, the entire estate becomes taxable rather than only the amount above the threshold. A small increase in value can produce a disproportionately large tax bill, which makes valuation especially important where the cliff applies.
Exemptions for Spouses and Charities
The unlimited marital deduction is the strongest shield in estate tax law. A deceased person can leave any amount of property to a surviving spouse who is a U.S. citizen with no federal estate tax, whether the transfer happens by will, joint ownership, life insurance, or another route.9Office of the Law Revision Counsel. 26 U.S.C. 2056 – Bequests, Etc., to Surviving Spouse Transfers to qualifying charities are similarly deductible without limit, and most states follow the federal approach on charitable bequests.
If the surviving spouse is not a U.S. citizen, the marital deduction is disallowed unless the assets pass through a qualified domestic trust, or QDOT. A QDOT must have at least one trustee that is a U.S. citizen or a domestic corporation, with the right to withhold estate tax from any distribution of principal.10Office of the Law Revision Counsel. 26 U.S. Code 2056A – Qualified Domestic Trust Without a QDOT, the deduction is lost and the transfer to the non-citizen spouse becomes potentially taxable.
Portability Between Spouses
Married couples can effectively combine their federal exemptions through portability. When the first spouse dies, any unused portion of that spouse’s $15 million exclusion can transfer to the survivor, giving the survivor up to $30 million in combined exemption.11Internal Revenue Service. Instructions for Form 706 The transferred piece is called the deceased spousal unused exclusion, or DSUE.
Portability is not automatic. The executor of the first estate has to file a complete Form 706 and elect it, even if no tax is otherwise owed. The standard deadline is nine months after the date of death, with a possible six-month extension. If no return was otherwise required, a late portability election is allowed up to five years after death under a special IRS procedure.12Internal Revenue Service. Instructions for Form 706 Once made, the election is irrevocable. A non-citizen surviving spouse cannot use DSUE except as a tax treaty allows, which is another reason those situations often rely on a QDOT.
What the Executor Files
The federal estate tax return is Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return.13Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return It is due nine months after the date of death.14Office of the Law Revision Counsel. 26 U.S. Code 6075 – Time for Filing Estate and Gift Tax Returns A six-month filing extension is available, but any estimated tax is still due at the nine-month mark to avoid interest. Payment normally comes out of the estate’s liquid assets before heirs receive anything. States with their own estate or inheritance tax have separate forms and deadlines through their departments of revenue.
Valuation drives everything on the return. The executor determines fair market value as of the date of death for real estate, bank and brokerage accounts, business interests, life insurance, retirement accounts, and personal property, and Form 706 requires detailed schedules with supporting appraisals and statements. Undervaluing has teeth: if reported value is 65 percent or less of the correct value, the IRS imposes a 20 percent penalty on the resulting underpayment, and if it drops to 40 percent or less, the penalty doubles to 40 percent.15Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments Those penalties come on top of the additional tax.