Maryland does not have an inheritance tax, but your estate may still owe federal taxes

Maryland abolished its inheritance tax in 2022. If someone leaves you money or property in their will, you will not owe Maryland state tax on that inheritance. However, the estate itself — the total value of everything the person left behind — may owe federal estate tax before the money reaches you, depending on how large it is.

This is an important distinction. An inheritance tax is paid by the person receiving the money. An estate tax is paid by the estate before distribution. Maryland has neither, but the federal government does have an estate tax that applies to very large estates.

Key Takeaways

  • Maryland repealed its inheritance tax effective January 1, 2022, so beneficiaries no longer owe state tax on inherited money or property.
  • The federal estate tax applies only to estates worth more than $13.61 million (as of 2024), and this threshold changes annually.
  • Even if an estate owes federal tax, beneficiaries typically receive their inheritance after the estate pays what is owed.
  • You should keep records of what you inherit and when, because the value of inherited assets may affect your own taxes later if you sell them.

When Maryland's inheritance tax ended

Maryland had an inheritance tax for over a century. It was repealed through legislation that took effect on January 1, 2022. This means that anyone who inherited money or property after that date owed no Maryland state tax on it.

If someone died before January 1, 2022, and their estate was still being settled after that date, the inheritance tax rules that were in place at the time of death applied. If you are unsure whether an inheritance you received was subject to the old tax, contact the Maryland Department of Revenue or the estate's executor.

How federal estate tax works instead

The federal government taxes very large estates, but the threshold is high. For 2024, the federal estate tax applies only to estates worth more than $13.61 million. Most Maryland residents will never deal with federal estate tax because their estates fall well below this amount.

This federal threshold changes every year based on inflation. It is scheduled to drop significantly after 2025 unless Congress acts, so if you are planning an estate or managing a very large one, check the current year's limit with a tax professional or the IRS website.

If an estate does owe federal tax, the executor pays it from the estate's assets before distributing money to beneficiaries. You as the beneficiary do not file a separate tax return for the inheritance itself.

What you need to know about inherited property and future taxes

While you do not owe tax on the inheritance when you receive it, inherited property gets a special tax advantage called a stepped-up basis. This means the property's value is reset to what it was worth on the date of death, not what the original owner paid for it.

This matters if you later sell inherited property. If you inherit a house worth $300,000 on the date of death and sell it a year later for $310,000, you owe tax only on the $10,000 gain, not on the full $310,000. Keep the death certificate and a professional appraisal from the date of death to prove the stepped-up basis to the IRS if you sell.

Inherited retirement accounts and income tax

Inherited money from retirement accounts like IRAs or 401(k)s is treated differently. You do not owe tax when you inherit the account, but you will owe federal income tax when you withdraw money from it. Maryland does not tax retirement income, so you will owe only federal tax on those withdrawals.

The rules for how quickly you must withdraw money from an inherited retirement account changed in 2023. Most beneficiaries must empty the account within 10 years. Talk to the account custodian or a tax professional about your specific timeline and tax obligations.

Inherited money and your own tax situation

Inherited cash does not count as income for federal tax purposes, so you do not report it on your tax return. However, if the inherited money earns interest or dividends after you receive it, that income is taxable and must be reported.

If you inherit a business or rental property, the income from that asset is taxable. Keep careful records of what you inherited, when you inherited it, and what it was worth at that time. These records protect you if the IRS ever questions your tax returns.

Frequently Asked Questions

Do I owe Maryland tax on money I inherited from someone who died in 2023?

No. Maryland's inheritance tax ended on January 1, 2022. Any inheritance received after that date is not subject to Maryland state tax, regardless of when the person died or how large the inheritance is.

What if the person who died had a very large estate?

The estate itself may owe federal estate tax if it exceeds $13.61 million (2024 threshold). The executor pays this tax from estate assets before distributing money to beneficiaries. You do not pay this tax yourself as the person receiving the inheritance.

Do I need to report inherited money on my tax return?

Inherited money itself does not go on your tax return. However, if the inherited money earns interest, dividends, or rental income after you receive it, that income must be reported. Keep records of the inheritance date and value for your records.

Can I deduct anything related to an inheritance on my taxes?

No. Inheritances are not deductible. However, if you inherit a business or rental property, you may be able to deduct expenses related to operating that asset, just as the original owner could have.

What is a stepped-up basis and why does it matter?

A stepped-up basis resets an inherited asset's value to what it was worth on the date of death. This reduces your taxable gain if you later sell the property. For example, if you inherit stock worth $50,000 and sell it for $55,000, you owe tax only on the $5,000 gain.