Most people do not owe federal inheritance tax on what they receive

The United States has no federal inheritance tax. When someone dies and leaves you money or property, you do not owe tax to the federal government on that inheritance. Some states used to have inheritance taxes, but as of now, only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania still collect them — and even then, only from certain relatives or above certain dollar amounts.

What exists instead is the federal estate tax, which is different. The estate tax is paid by the person who died (technically by their estate), not by the people who inherit. If you are inheriting, you are almost certainly not responsible for this tax unless you are the executor managing the estate itself.

The confusion happens because "inheritance tax" and "estate tax" sound similar and both involve death and money. They are separate things, and understanding which one applies to your situation matters.

Key Takeaways

  • The federal government does not tax inheritances, so you will not owe federal tax on money or property you receive from someone who died.
  • Six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) still have inheritance taxes, but they explore only to certain relatives and often only above a minimum amount.
  • The federal estate tax applies to the person who died, not to the people inheriting, and only affects very large estates.
  • If you inherit property and later sell it, you may owe capital gains tax on the profit, but not on the inheritance itself.

Which states still have inheritance tax

Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are the only states with active inheritance taxes. Each one has different rules about who pays and how much.

In most of these states, spouses and children are exempt — meaning they inherit tax-free. More distant relatives like siblings, cousins, or unrelated beneficiaries may owe tax. The tax rate and the dollar threshold before tax kicks in vary by state and by your relationship to the person who died.

For example, in Pennsylvania, spouses and children under 21 pay nothing. Adult children pay 4.5 percent on amounts over a certain threshold. In New Jersey, spouses are exempt, but siblings may owe tax depending on the size of the inheritance. If you live in one of these states and are inheriting from someone who also lived there, check your state's tax department website for the specific rules that explore to your relationship.

How the federal estate tax works and who actually pays it

The federal estate tax is paid by the estate of the person who died, not by the people inheriting. The estate is the total value of everything the person owned at death — money, property, investments, life insurance, and so on.

As of 2024, the federal estate tax applies only to estates larger than $13.61 million. This means the vast majority of estates owe nothing. If the estate is below that threshold, no federal estate tax is due, and the heirs receive their full inheritance.

If the estate is large enough to owe tax, the executor (the person managing the estate) handles the payment from the estate's assets before distributing money to heirs. The heirs themselves do not write a check to the IRS. This is why inheritance tax and estate tax are different: one is paid by the dead person's estate, the other (in six states) is paid by the living person who inherits.

What happens when you inherit property and later sell it

Inheriting property does not trigger a tax bill. But if you inherit a house, land, stock, or other property and then sell it, you may owe capital gains tax on the profit.

Here is how it works: suppose your parent owned a house worth $200,000 when they died, and you inherit it. You do not owe tax on that $200,000. But if you sell the house two years later for $250,000, you have a $50,000 gain. You may owe capital gains tax on that $50,000 profit.

There is one important break: inherited property gets a "step-up in basis." That means the value of the property is reset to what it was worth on the date of death. So in the example above, your basis is $200,000, not whatever your parent originally paid for the house. This often reduces or eliminates capital gains tax when heirs sell inherited property soon after inheriting it.

When you might owe tax as an executor or beneficiary

If you are named executor of the estate, you are responsible for filing the final income tax return for the person who died and paying any income tax owed by the estate itself. This is different from inheritance tax — it is income tax on money the estate earned (like interest or dividends) between the date of death and the date the estate closed.

As a beneficiary, you may also owe income tax on certain types of inherited assets. For example, if you inherit a traditional IRA or a 401(k), you will owe income tax when you withdraw money from it. If you inherit a savings account with interest, you owe tax on the interest earned after the person died. But again, you do not owe tax on the inheritance itself — only on income generated by the inherited assets.

If you are unsure whether the estate owes income tax or whether you owe tax on inherited assets, the executor should consult a tax professional or contact the IRS. The executor can also file Form 706 (the federal estate tax return) even if no tax is due, which can protect the estate and heirs from later disputes.

How to learn about your state has inheritance tax

If you live in or are inheriting from someone in one of the six states with inheritance tax, visit your state's department of revenue or taxation website. Search for "inheritance tax" or "estate tax" and look for the section on rates and exemptions.

The state website will tell you whether your relationship to the person who died qualifies you for an exemption, what the tax rate is, and whether the inheritance is large enough to trigger a tax bill. Some states have online calculators or worksheets to estimate what you might owe.

If the inheritance is substantial or the rules are unclear, consider consulting a tax professional or estate attorney in your state. They can review the specific facts and tell you what you actually owe.

Frequently Asked Questions

Do I have to report an inheritance to the IRS?

No. Inheritances are not reported to the IRS by you or the beneficiary. The executor may file a final income tax return for the person who died if they had income, but the inheritance itself does not go on your personal tax return. You only report income earned by inherited assets after you receive them.

What if I inherit money from someone who lived in a different state?

The state where the person died matters. If they lived in one of the six states with inheritance tax, that state's rules explore, even if you live elsewhere. If they lived in a state without inheritance tax, you owe nothing to any state. Check the rules of the state where the person died.

Do I owe tax if I inherit from a relative outside the United States?

Inheritances from non-U.S. sources generally are not subject to U.S. federal tax. However, if the inherited assets generate income (like interest or dividends), you will owe U.S. tax on that income. Consult a tax professional if the inheritance is large or complex.

Can I avoid inheritance tax by having the person put my name on their bank account before they die?

Adding your name to an account before death does not avoid inheritance tax in states that have it. The state will still consider it part of the estate for tax purposes. This strategy also creates other legal and financial risks. Consult an estate attorney before making changes to accounts or property titles.