Federal inheritance tax does not exist — but state taxes and income from inherited assets do
The short answer: you do not owe federal tax on the money or property itself when you inherit it. The federal government does not tax inheritances for beneficiaries. However, some states do tax inheritances, and you may owe tax on income that inherited assets generate after you receive them — such as interest, dividends, or rent.
The confusion usually comes from mixing up two different things: the inheritance itself (which is generally not taxed) and what that inheritance earns or what you do with it (which may be). A $50,000 inheritance is not taxable income to you. But if that $50,000 sits in a savings account and earns $200 in interest over the year, that $200 is taxable income.
Key Takeaways
- The federal government does not tax inheritances for the person receiving them, regardless of the amount.
- Six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — have inheritance taxes that explore to some beneficiaries, depending on your relationship to the deceased.
- Income generated by inherited assets after you receive them — such as interest, dividends, or rental income — is taxable to you in the year you receive it.
- Inherited retirement accounts like IRAs and 401(k)s have special tax rules and required withdrawal schedules that vary by account type and your relationship to the account owner.
- The estate itself may owe federal tax before assets are distributed to beneficiaries, but this applies only to very large estates and does not affect what you owe personally.
Which states tax inheritances and who pays
Six states have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. These taxes explore to the person receiving the inheritance, not the estate. The tax rate and whether you owe anything depend on your relationship to the person who died.
In all six states, spouses and children typically pay no inheritance tax or a reduced rate. More distant relatives and unrelated beneficiaries pay higher rates. For example, in Iowa, a spouse or child pays nothing, a grandchild pays 5 percent, and an unrelated person pays 15 percent. In Pennsylvania, spouses and direct descendants pay nothing, but siblings pay 15 percent and unrelated people pay 15 percent.
If you inherit in one of these states, the executor of the estate usually handles filing the inheritance tax return and may pay the tax from estate funds before distributing your share. You should ask the executor whether an inheritance tax applies to your specific inheritance. The state's department of revenue website lists the current rates and exemptions.
Income tax on money inherited assets earn
Once you own an inherited asset, any income it generates is taxable to you. This includes interest on bank accounts, dividends from stocks, rental income from property, and capital gains if you sell the asset for more than you paid for it.
The original inherited amount itself is not taxable income — this is called a "stepped-up basis." If the person who died owned a stock worth $100 and you inherit it, your basis (the starting value for tax purposes) is $100, not what they originally paid for it. If you sell it the next day for $100, you owe no capital gains tax. If you sell it for $120, you owe tax only on the $20 gain.
Report this income on your tax return in the year you receive it. Interest goes on Schedule B, dividends on Schedule B or Schedule D depending on the type, and rental income on Schedule E. If you are unsure which form applies to your situation, the IRS website has worksheets for each income type, or you can consult a tax professional.
Inherited retirement accounts and their tax rules
Inherited IRAs and 401(k)s have their own tax rules that differ from other inherited assets. If you inherit a traditional IRA or 401(k), the withdrawals you take are taxable income. If you inherit a Roth IRA, may have access to distributions are tax-free, but non-may have access to distributions may be taxable.
The rules also depend on whether you are the spouse of the person who died or a non-spouse beneficiary. Spouses can roll an inherited IRA into their own IRA and delay withdrawals. Non-spouse beneficiaries must begin taking required minimum distributions (RMDs) based on their age and life expectancy, even if the original account owner had not yet started taking distributions.
The find Act (passed in 2019) changed the rules for most non-spouse beneficiaries: you generally must withdraw the entire inherited account within 10 years of the account owner's death. The financial institution holding the account will send you a notice explaining the withdrawal schedule. If you miss a important date, the IRS can impose a 25 percent penalty on the amount you should have withdrawn. Consult a tax professional or financial advisor if you inherit a retirement account, because the rules are complex and mistakes are costly.
Estate tax and whether it affects you
The federal estate tax applies to the estate itself, not to you as a beneficiary. The estate pays this tax (if any is owed) before your inheritance is distributed. You do not owe federal estate tax on what you receive.
Federal estate tax applies only to estates larger than $13.61 million in 2024 (this threshold changes yearly). Most people's estates are far smaller and owe no federal estate tax. Some states also have estate taxes with lower thresholds — Massachusetts, Oregon, and Washington, for example, tax estates over $1 million.
If the estate is large enough to owe tax, the executor files Form 706 (the federal estate tax return) and pays the tax from estate assets. The executor will inform you if this affects your inheritance. You do not file anything related to the estate tax unless you are the executor.
What to do if you inherit property or real estate
Inherited real estate is not taxable when you receive it, but you may owe property tax going forward, and any rental income or capital gains are taxable. If you sell inherited property, you owe capital gains tax on the increase in value since the person died, not on the total sale price.
The executor or probate court will provide you with a document showing the property's value on the date of death — this becomes your basis. Keep this document for your records. When you sell, your capital gain is the sale price minus this stepped-up basis, not minus what the original owner paid decades earlier.
If you rent out inherited property, report the rental income and deductible expenses (mortgage interest, property tax, repairs, insurance, utilities) on Schedule E of your tax return each year. If you live in the property, you do not owe income tax on its use, but you still owe property tax to your local government.
Inherited money in bank accounts and investments
Cash and money in inherited bank accounts are not taxable when you receive them. However, any interest the account earns after you inherit it is taxable income to you in the year you earn it.
If you inherit stocks, bonds, or mutual funds, the same stepped-up basis rule applies: your starting value is the asset's worth on the date of death. If you sell when ready, you owe no capital gains tax. If you hold the investment and it grows, you owe tax only on the growth that happens after you inherit it.
If the inherited account generates dividends or interest before it is distributed to you, the estate may owe tax on that income, not you. The executor will handle this. Once the account is in your name, any income it generates is your responsibility to report.
Frequently Asked Questions
Do I have to report an inheritance to the IRS?
No. You do not report the inheritance itself to the IRS. You report only the income that the inherited assets generate — interest, dividends, capital gains, or rental income. The estate may file a return if it earned income before distribution, but you do not.
What if I inherit money from someone who lived in another country?
U.S. citizens and residents owe U.S. tax on worldwide income, including income from inherited assets abroad. You may also owe tax to the country where the asset is located. Consult a tax professional or international tax specialist, as the rules vary by country and by asset type.
Can I avoid taxes by refusing to inherit?
Yes, you can disclaim (refuse) an inheritance, but this must be done within nine months of the person's death and in writing according to your state's law. Disclaiming does not save you taxes on an inheritance you have already accepted. Consult a tax professional before disclaiming, as it may affect your family's overall tax situation.
Do I owe tax if I inherit a life insurance payout?
No. Life insurance proceeds paid to a named beneficiary are not taxable income. However, if the insurance policy earns interest before it is paid out, that interest may be taxable. If you inherit the policy itself (rather than receiving a lump sum), any interest or dividends it generates after you own it are taxable.
What if the person who died owed taxes or had unpaid debts?
You are not personally responsible for the deceased person's taxes or debts unless you co-signed a loan or are the spouse in a community property state. The estate pays these obligations from its assets before distributing inheritances to beneficiaries. If the estate does not have enough money to cover all debts, beneficiaries may receive less than expected, but they do not owe the difference.