There is no dollar cap on how much money you can inherit tax-free at the federal level as the person receiving it. Federal law excludes inheritances from your gross income, so cash, real estate, stocks, and other assets passed to you at someone’s death do not show up on your tax return. Any federal estate tax is paid by the estate before assets reach you, and that tax only applies when the estate is worth more than $15 million in 2026. The places heirs actually get taxed are narrower: inherited retirement accounts, a handful of state estate and inheritance taxes, and a reporting trap on foreign inheritances.
The Federal Rule: Inheritances Are Not Income
Property you receive because someone died is not part of your taxable income.1Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances You do not report a $10,000 inheritance, and you do not report a $10 million inheritance. The income tax system and the estate tax system run on separate tracks, and the estate handles whatever tax is owed before the money reaches you.
The federal estate tax itself is calculated on the total net value of everything the person owned at death, including real estate, investments, business interests, and life insurance proceeds. For 2026, the basic exclusion amount is $15 million per individual, and only the portion above that is taxed, at rates reaching 40%.2Internal Revenue Service. What’s New – Estate and Gift Tax The $15 million figure was set by the One, Big, Beautiful Bill Act signed on July 4, 2025, and it will be indexed for inflation starting in 2027.3Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
Married couples can combine their exemptions to shelter up to $30 million. When the first spouse dies, any unused portion of their exemption can transfer to the survivor, but only if the executor files IRS Form 706 and formally elects portability, even when no tax is owed.4Internal Revenue Service. Instructions for Form 706 – Part VI Portability of Deceased Spousal Unused Exclusion Skip that filing and the unused exemption is gone permanently.
The practical takeaway: most American families never come near the federal threshold. If the estate you are inheriting from is worth less than $15 million, federal estate tax is a non-issue.
State Estate and Inheritance Taxes
State-level taxes are where an estate that owes nothing to the IRS can still generate a real bill. Twelve states plus the District of Columbia impose their own estate taxes, and five states levy inheritance taxes paid directly by the person receiving assets. Some state exemptions start as low as $1 million, and the highest state estate tax rates reach 20%.
State estate tax works like the federal version: it comes out of the estate before distribution. State inheritance tax is structured differently. It falls on each beneficiary individually and depends on how closely you were related to the person who died. The five states with an inheritance tax are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa repealed its inheritance tax effective January 1, 2025.
In all five inheritance-tax states, surviving spouses are fully exempt. Children and grandchildren are either exempt or taxed at the lowest rate. The heaviest rates, up to 16%, fall on unrelated beneficiaries and distant relatives. Maryland stands alone in imposing both an estate tax and an inheritance tax, though credits generally prevent complete double taxation.
If either the person who died or the assets you are inheriting are connected to one of these states, check the state’s specific thresholds and rate schedule. A mid-size estate that clears the $15 million federal bar with room to spare can still leave heirs with a six-figure state tax bill.
Inherited Retirement Accounts Are the Real Tax Trap
The main way ordinary heirs actually pay tax on an inheritance is through retirement accounts. Traditional IRAs, 401(k)s, and similar accounts were funded with pre-tax dollars, so the money inside has never been taxed. Inherit one, and you inherit the tax bill. Every dollar you withdraw is taxed as ordinary income in the year you take it out.
The 10-Year Rule
If the original account owner died after December 31, 2019, most non-spouse beneficiaries must empty the entire inherited account by the end of the tenth calendar year after the owner’s death.5Internal Revenue Service. Retirement Topics – Beneficiary The old option of stretching withdrawals over your own life expectancy is gone for most heirs.
The compressed timeline creates real tax problems. Draining a $500,000 inherited IRA over ten years adds roughly $50,000 of ordinary income each year, which can push you into a higher bracket. Bunching the withdrawals into fewer years makes it worse. Spreading them deliberately across the window is one of the few tools available.
There is also an annual-distribution wrinkle. If the original owner had already begun taking their own required minimum distributions before death, you must also take annual distributions during years one through nine, with the balance due in year ten.6Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions This was clarified in final IRS regulations effective for 2025. If the original owner died before their required beginning date, no annual distributions are required in years one through nine, but the account must still be fully emptied by the end of year ten. Missing an annual distribution triggers a 25% excise tax on the shortfall, dropping to 10% if you take the corrective distribution within two years.7eCFR. 26 CFR 54.4974-1 – Excise Tax on Accumulations in Qualified Retirement Plans
Beneficiaries Who Can Still Stretch
Some beneficiaries are exempt from the 10-year rule and can still take distributions over their own life expectancy:5Internal Revenue Service. Retirement Topics – Beneficiary
- A surviving spouse, who also has the option of rolling the account into their own IRA and delaying distributions until their own required beginning date.
- A disabled or chronically ill individual.
- Someone not more than 10 years younger than the deceased, such as a sibling close in age.
- A minor child of the deceased, who can use life expectancy distributions until reaching the age of majority, at which point the 10-year clock starts.
Inherited Roth IRAs
Roth accounts flip the outcome. Because contributions were made with after-tax dollars, qualified distributions to beneficiaries come out entirely income-tax-free. The 10-year rule still applies to most non-spouse beneficiaries, but the withdrawn funds are not taxable income. An inherited Roth is about as close to a tax-free windfall as the code allows.
Life Insurance Proceeds
Life insurance paid because the policyholder died is excluded from your gross income.8Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits A $1 million death benefit paid to you as a named beneficiary is $1 million with no income tax owed.
The catch is on the estate side, and it only matters near the $15 million line. If the person who died owned the policy or held “incidents of ownership” over it (the right to change beneficiaries, borrow against it, or cancel it), the full death benefit is included in their taxable estate.9Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance A $3 million policy on someone with a $14 million estate pushes the total to $17 million, over the federal exemption, even though you receive the insurance itself tax-free.
Selling Inherited Property: The Step-Up in Basis
Receiving the inheritance is one event. Selling what you inherited later is another, and that is where capital gains tax could show up. The step-up in basis is the rule that usually spares you.
When you inherit a capital asset, your tax basis resets to its fair market value on the date of death.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If your parent bought stock for $50,000 and it was worth $500,000 when they died, your basis is $500,000. Sell it the next month for $500,000 and you owe zero capital gains tax. Hold it and sell for $550,000 later, and you only owe tax on the $50,000 of appreciation that happened after you inherited it. Decades of prior growth are wiped clean.
The step-up applies to real estate, stocks, and business interests. Assets that declined in value step down to the lower fair market value instead.11Internal Revenue Service. Gifts and Inheritances Get a professional appraisal for real estate and other hard-to-value assets at the time of death; the IRS will want documentation if you later claim a high stepped-up basis on a sale.
Surviving spouses in community property states get an extra benefit. Both halves of community property step up when one spouse dies, not just the deceased spouse’s half.12Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent – Section 1014(b)(6) The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In common-law states, only the deceased spouse’s share of jointly held property steps up.
One category of asset does not get the step-up: income the deceased earned but never received, such as unpaid wages, accrued interest, or the taxable portion of a retirement account. That income is taxed to you as ordinary income when you receive it, just as it would have been taxed to the person who earned it. Retirement account distributions are the most common form, which is why inherited traditional IRAs and 401(k)s remain taxable regardless of the step-up.
Inheriting From Someone Outside the United States
A foreign inheritance is not taxable income to you in the U.S., but it comes with a reporting requirement that catches people off guard. If you receive more than $100,000 during a single tax year from a foreign estate or a nonresident alien individual, you must report it on Form 3520. This is an information return, not a tax payment.
The penalty for filing late is 5% of the foreign gift or bequest for each month the return is late, up to 25%.13Internal Revenue Service. Instructions for Form 3520 On a $500,000 foreign inheritance, that is $25,000 a month for a paperwork failure. A reasonable-cause exception exists, but the IRS states that penalties imposed by a foreign country for disclosing the information do not qualify.
Gifts and Inheritances Are Not the Same Thing
People sometimes confuse the $19,000 annual gift exclusion with a limit on inheritances. They are unrelated. The $19,000 figure is the annual amount one person can give another during life without touching the lifetime exemption; it is $19,000 for both 2025 and 2026, and a married couple can combine theirs to give $38,000 per recipient.2Internal Revenue Service. What’s New – Estate and Gift Tax Gifts above that annual exclusion reduce the donor’s lifetime exemption but do not create an immediate tax bill. The federal gift tax and estate tax share the same $15 million exemption, and any tax due falls on the donor or the estate, never on the recipient.
Basis treatment is the other place gifts and inheritances part company. Gifted assets carry over the donor’s original basis. Inherited assets get the step-up. If your parent gives you stock they bought for $10,000 that is now worth $200,000, your basis is $10,000, and selling triggers capital gains tax on $190,000. If you inherit the same stock instead, your basis is $200,000 and a sale at that price generates no tax. For highly appreciated assets, waiting until death is worth far more than a lifetime transfer.
So the honest answer to how much you can inherit without paying taxes: at the federal level, the amount is unlimited as far as income tax goes, and the estate tax only kicks in above $15 million and is paid by the estate. Watch the retirement account you inherit, check whether your state or the decedent’s state imposes its own tax, and file Form 3520 on time if the money came from abroad. Those are the places heirs actually get hit.