Federal inheritance tax does not exist — but your state might have one

The federal government does not tax you on money or property you inherit. There is no federal inheritance tax. What exists instead is a federal estate tax, which is paid by the person who died — or rather, by their estate before the money reaches you. If the estate is small enough, no estate tax is owed at all, and you receive everything tax-free.

Six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — do tax inheritances directly. The amount you owe depends on your relationship to the person who died and the size of your inheritance. A spouse or child usually pays nothing or a lower rate than a distant relative would. If you live in one of these states and inherited money, you may owe state tax even though the federal government does not.

The other 44 states have no inheritance tax. If you live outside the six states listed above, you will not owe state tax on what you inherit, regardless of the amount.

Key Takeaways

  • The federal government does not tax inheritances; only six states do, and the tax depends on your relationship to the person who died.
  • An estate tax is paid by the estate itself before money reaches heirs, not by the heirs; most estates owe nothing because the federal threshold is over $13 million.
  • If you inherited money in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, check your state's rules for your relationship category and the amount you received.
  • Inherited retirement accounts like IRAs and 401(k)s have different rules and may require you to take withdrawals that are taxable as income, separate from inheritance tax.

How the federal estate tax works and who actually pays it

The federal estate tax applies to the total value of everything a person owned when they died — their house, bank accounts, investments, retirement accounts, and personal property. In 2024, the first $13.61 million is exempt from federal tax. Anything above that amount is taxed at 40 percent, but only the amount over the threshold is taxed.

The estate itself pays this tax before distributing money to heirs. The person who manages the estate (called the executor or personal representative) files a federal estate tax return if the estate is large enough. Most people who die do not leave estates large enough to owe federal tax. You inherit the remainder after the estate pays any taxes, debts, and costs.

The federal exemption changes every year and is set to drop significantly in 2026 unless Congress acts. For now, if someone dies and leaves less than $13.61 million, their heirs owe no federal estate tax.

State inheritance taxes: which states tax you and how much

Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are the only states that tax what you inherit. Each state sets its own rates and rules about who pays and how much.

In most of these states, spouses and children pay nothing or a reduced rate. More distant relatives — siblings, cousins, or unrelated people — pay higher rates or are taxed on larger amounts. For example, New Jersey taxes direct descendants (children and grandchildren) at rates between 11 and 16 percent, but taxes siblings at 13 to 17 percent and unrelated people at 15 to 18 percent. The rates also depend on the size of the inheritance.

If you inherited money and live in one of these six states, contact your state's tax department or a tax professional to find out whether you owe tax. The amount you owe is based on your specific relationship to the person who died and the value of what you received.

Inherited retirement accounts and how they are taxed

Inherited IRAs, 401(k)s, and other retirement accounts do not count as inheritance for tax purposes — they are taxed as income when you withdraw the money. This is separate from inheritance tax or estate tax.

The rules changed in 2023 under the find Act. If you inherited a retirement account from someone who was not your spouse, you generally must withdraw all the money within 10 years. Each withdrawal is taxed as ordinary income in the year you take it. If you inherited a large account, spreading withdrawals across multiple years can lower your tax bill by keeping you in a lower tax bracket each year.

If you inherited a retirement account from your spouse, you have more options: you can roll it into your own IRA, treat it as your own account, or withdraw it over your lifetime. Consult a tax professional or the account custodian about the best strategy for your situation.

What happens if you inherit property or a house

Inheriting real estate does not trigger inheritance tax in most states. However, you may owe property tax going forward, and if you later sell the property, capital gains tax may explore.

When you inherit property, you receive what is called a "stepped-up basis." This means the value of the property for tax purposes is reset to what it was worth on the day the person died, not what they originally paid for it. If the property was worth $300,000 when the person died and you sell it a year later for $310,000, you owe capital gains tax only on the $10,000 gain, not on the full $310,000.

If you live in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, inherited real estate may be subject to state inheritance tax depending on your relationship to the person who died. Check your state's rules or speak with a tax professional.

Inherited money in bank accounts and investments

Cash, stocks, bonds, and other investments you inherit are not subject to federal inheritance tax. The estate pays any federal estate tax before the money reaches you, and you receive it tax-free.

If you inherited these assets in one of the six states with inheritance tax, you may owe state tax depending on your relationship to the person who died and the amount. The state tax is usually paid from the inherited money itself, similar to how federal estate tax works.

If the inherited investments later earn income — dividends, interest, or capital gains — that income is taxable to you in the year you receive it. This is separate from the inheritance itself.

Gifts versus inheritances: different rules explore

Money or property someone gives you while they are alive is treated differently from an inheritance. The person giving the gift may owe federal gift tax if they give more than $18,000 to one person in a single year (in 2024), but you never owe tax on the gift itself.

If someone gives you money and then dies within a short time, the IRS may examine whether the gift was actually an advance on your inheritance. This rarely matters for small amounts, but it can affect very large estates. If you received a large gift from someone who recently died, mention it to the estate's tax professional.

Frequently Asked Questions

Do I have to report an inheritance on my tax return?

No. Inheritances are not reported on your federal income tax return. If the estate owed federal estate tax, the executor files a separate estate tax return, not you. If you live in one of the six states with inheritance tax, that state may require you to file a separate inheritance tax return or may require the estate to report it.

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

Federal tax is based on where the person died, not where you live. If they died in a state with no inheritance tax, you owe no state inheritance tax. If they died in one of the six states with inheritance tax, you may owe that state's tax depending on your relationship to them, even if you live elsewhere.

Can I reduce the inheritance tax I owe?

In states with inheritance tax, spouses and children usually pay lower rates or nothing. If you are a more distant relative, you may owe tax, but the amount depends on the state's rules and the size of your inheritance. A tax professional in your state can tell you what you owe and whether any deductions explore.

What if the person who died left a will that says I get everything?

A will does not change inheritance tax or estate tax. The will determines who receives the money, but the tax rules are the same. The estate still pays federal estate tax if it is large enough, and you still owe state inheritance tax if you live in one of the six states that has it.

Do I owe taxes on life insurance money I inherited?

No. Life insurance proceeds paid to a named beneficiary are not subject to federal income tax. They may be included in the estate for federal estate tax purposes if the estate is very large, but you do not owe income tax on the payout. State inheritance tax rules vary; check your state's rules if you live in one of the six states with inheritance tax.