In most cases, no. You generally do not have to pay taxes on an inheritance under federal law: the federal government imposes no inheritance tax at all, and the federal estate tax only applies to estates worth more than $15 million in 2026. Where heirs actually see a tax bill is at the state level in a handful of states, and on inherited retirement accounts, which are taxed as ordinary income when you withdraw the money.
Federal Inheritance Tax vs. Federal Estate Tax
These two taxes get confused constantly, and the distinction matters for who writes the check.
An estate tax is paid by the estate itself before anything reaches you. The executor values the deceased person’s assets, subtracts deductions, and pays the tax out of estate funds.1Internal Revenue Service. Estate Tax You receive what’s left.
An inheritance tax works the opposite way. The person who receives the assets pays it, usually at a rate that depends on how closely they were related to the deceased. Spouses typically owe nothing; distant relatives and unrelated heirs pay the highest rates.
The federal government only has the first of these. There is no federal inheritance tax. And the federal estate tax exemption for 2026 is $15 million per individual, made permanent by the One Big Beautiful Bill Act signed in July 2025, with annual inflation adjustments starting in 2027.2Internal Revenue Service. What’s New – Estate and Gift Tax Married couples can effectively shield $30 million through portability, but only if the executor files Form 706 within nine months of the first spouse’s death.3Internal Revenue Service. Instructions for Form 706 Fewer than 1% of estates ever owe federal estate tax. The top rate on the amount above the exemption is 40%.
State Inheritance and Estate Taxes
State taxes are where the answer changes for more people, because state thresholds are far lower and five states tax the heir directly.
The Five Inheritance Tax States
An inheritance tax paid by the beneficiary applies in:
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
Iowa fully repealed its inheritance tax for deaths on or after January 1, 2025. In the remaining states, the rate depends on your relationship to the deceased. Surviving spouses are generally exempt. Children and grandchildren often pay low rates or nothing. Siblings, nieces, nephews, and unrelated heirs pay the most, reaching as high as 15% or 16% depending on the state.
The State Estate Tax States
Twelve states plus the District of Columbia impose an estate tax paid by the estate:
- Connecticut
- District of Columbia
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
Maryland is the only state that has both. State estate tax exemptions run from $1 million in Oregon up to figures near the federal level in Connecticut, so an estate that owes nothing federally can still owe a substantial state tax. Washington’s top rate of 20% is the highest among the states.
Income Tax on What You Inherit
Receiving inherited property is not itself a taxable event on your income tax return. The tax questions start when you sell an inherited asset, take money out of an inherited retirement account, or collect income the deceased had earned but not yet been paid.
Step-Up in Basis Wipes Out Most Capital Gains
When you inherit real estate, stocks, or mutual funds, your cost basis resets to the fair market value on the date the owner died.4Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If your parent bought a house for $80,000 and it was worth $400,000 when they died, your basis is $400,000. Sell soon after for that price and the capital gain is zero. Without the step-up you’d be taxed on $320,000 of appreciation.
This is the single biggest tax benefit for most heirs, and it applies to most capital assets passed through an estate. It does not apply to everything, though.
Inherited Retirement Accounts Are Taxed as Income
Traditional IRAs and 401(k) balances do not get a step-up. They fall into a category called income in respect of a decedent, meaning income the deceased earned but never received.5Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators Every dollar you withdraw from an inherited traditional retirement account is taxed as ordinary income at your regular rate.6Internal Revenue Service. Retirement Topics – Beneficiary
How fast you have to withdraw depends on your relationship. A surviving spouse can roll the account into their own IRA, delay distributions until their own required beginning date, or take a lump sum. Most other beneficiaries are subject to the SECURE Act’s 10-year rule: the account must be emptied by December 31 of the tenth year after the owner’s death. A narrow group of eligible designated beneficiaries — minor children of the deceased, disabled or chronically ill individuals, and people no more than ten years younger than the account owner — can still stretch distributions over their own life expectancy.
One trap catches beneficiaries under the 10-year rule. If the original owner died after their required beginning date (generally age 73), you must also take annual required minimum distributions during the 10-year window, not just empty the account by year ten. The final regulations enforcing this took effect for distributions starting in 2025.7Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions
Inherited Roth IRAs follow the same distribution timelines, but withdrawals are generally tax-free as long as the original owner held the Roth for at least five years before death.
Other Income the Deceased Earned
Unpaid wages, unused vacation pay, bonuses, and commissions the deceased had earned but not yet received are also income in respect of a decedent. Whoever ends up receiving that money — the estate or a beneficiary — reports it as taxable income on their own return.5Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators
The 3.8% Surtax on Big Gains
If you sell an inherited asset years later at a price well above its stepped-up basis, the net investment income tax can add 3.8% on top of the capital gains tax. It applies once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married filing jointly.8Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
Life Insurance Proceeds
Death benefits from a life insurance policy are generally not taxable income to the beneficiary.9Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits A $500,000 payout can arrive with no income tax due on it. Two things to watch: any interest the insurer paid on the proceeds while holding them is taxable and will show up on a 1099,10Internal Revenue Service. Life Insurance and Disability Insurance Proceeds and if the policy was transferred to you for value before the insured died, the tax-free exclusion may be limited.
Reporting Even When You Don’t Owe Anything
Some inheritances trigger mandatory reporting to the IRS regardless of whether any tax is due. Skipping these can produce penalties on their own.
Form 8971 for Large Estates
When an estate is large enough to require a federal estate tax return, the executor must file Form 8971 reporting the value of inherited assets to both the IRS and each beneficiary, within 30 days of filing the estate tax return or its due date, whichever comes first.11Internal Revenue Service. Instructions for Form 8971 and Schedule A The value on that form becomes your cost basis when you sell. Reporting a different number can bring penalties.
Foreign Inheritances
Money or property from someone outside the U.S. follows the same tax rules but adds paperwork. Receive more than $100,000 during the year from a foreign person or foreign estate and you must file Form 3520.12Internal Revenue Service. Instructions for Form 3520 It’s an information return, not a tax bill, but the penalty for missing it can reach 25% of the unreported amount.
If the inheritance includes a foreign financial account and the total value of all your foreign accounts exceeds $10,000 at any point in the year, you must also file an FBAR (FinCEN Form 114), even if the account produces no income.13Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) Willful failure carries serious civil and criminal penalties, so this filing is worth taking seriously even when the inheritance itself is tax-free.