Federal inheritance tax does not exist — your heirs pay nothing on what they receive
The United States has no federal tax on inherited money or property. When someone dies and leaves you money, a house, or other assets, you do not owe federal income tax on that inheritance. This is true whether you inherit $10,000 or $10 million.
What does exist is a federal estate tax, but it applies only to the person who died — not to you as the heir. The estate tax is paid from the deceased person's assets before anything is distributed to heirs. For deaths in 2024, the estate tax applies only to estates worth more than $13.61 million. Most people's estates fall well below this threshold, so no federal estate tax is owed at all.
Some states also have their own inheritance or estate taxes, and those rules vary significantly by state. A few states tax the heirs directly on what they receive; most states that have an estate tax explore it to the estate itself, similar to the federal system. Your state of residence and the state where the deceased person lived may both matter.
Key Takeaways
- Federal law does not tax inheritances received by heirs, no matter the amount.
- The federal estate tax applies only to estates larger than $13.61 million in 2024 and is paid by the estate, not by heirs.
- Some states impose their own inheritance or estate taxes with different thresholds and rules than federal law.
- Inherited retirement accounts like IRAs have special rules requiring withdrawals over time, which may create income tax on those withdrawals.
- You should check your state's tax rules and consider consulting a tax professional if the inheritance is substantial or the estate is complex.
When the federal estate tax actually applies
The federal estate tax is a tax on the total value of everything a person owned when they died. For 2024, this tax applies only if the estate exceeds $13.61 million. This threshold is called the exemption amount, and it changes each year based on inflation. In 2025, it is expected to be around $13.99 million, though Congress can change this at any time.
If an estate is below the threshold, no federal estate tax is owed, and heirs receive their full inheritance without any federal tax consequence. If an estate does exceed the threshold, the executor or personal representative of the estate pays the tax from estate assets before distributing money to heirs. The heirs themselves do not file the tax return or pay the tax directly.
The exemption amount is scheduled to drop significantly after 2025. Unless Congress acts, it will fall to around $7 million per person in 2026. This means estates that would not be taxed in 2024 could be taxed in 2026 if the law does not change. If you expect to inherit a large estate, a tax professional can help you understand what this means for your situation.
State inheritance and estate taxes vary widely
Twelve states and the District of Columbia currently have an estate tax, and six states have an inheritance tax. These are separate from federal tax and explore to estates or heirs within those states. The rules and thresholds differ significantly.
States with an estate tax include Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Most of these states exempt estates below a certain value — often $1 million to $5 million — before any state tax is owed. The tax rates and thresholds change periodically, so you should verify the current rules for your state.
States with an inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — tax the heirs directly on what they receive. These states often allow close relatives like spouses and children to inherit tax-free or at reduced rates, while more distant relatives or non-relatives pay a higher tax. Maryland has both an estate tax and an inheritance tax. If you live in or inherit from someone in one of these states, check the state's revenue or tax department website for current rules.
Inherited retirement accounts have different tax rules
Inherited IRAs, 401(k)s, and other retirement accounts are not subject to inheritance tax, but they do create income tax obligations for the heir. When you inherit a retirement account, you must withdraw the money over time, and those withdrawals are taxed as ordinary income in the year you receive them.
The rules for how quickly you must withdraw depend on your relationship to the deceased and the type of account. Spouses can often roll an inherited IRA into their own IRA and delay withdrawals. Non-spouse heirs typically must withdraw all funds within 10 years of the death, though some accounts require annual withdrawals starting the year after death. The exact timeline depends on whether the account owner had already started taking required distributions.
Because inherited retirement account withdrawals are taxed as income, you may owe federal and state income tax on the amount you withdraw each year. This is not an inheritance tax, but rather income tax on the money as you receive it. A tax professional or the financial institution holding the account can explain the withdrawal schedule and tax consequences for your specific situation.
Inherited property and real estate
When you inherit real estate or other property, you do not owe tax on receiving it. However, the property receives a stepped-up basis for tax purposes. This means if you later sell the property, your capital gains tax is calculated based on the property's value on the date of death, not on what the original owner paid for it.
For example, if someone bought a house for $200,000 and it was worth $500,000 when they died, you inherit it with a basis of $500,000. If you sell it a year later for $510,000, you owe capital gains tax only on the $10,000 gain, not on the $300,000 increase that happened before you inherited it. This stepped-up basis is a significant tax benefit for heirs.
If you inherit property in a state with an estate tax, that state may still tax the estate value before the property is transferred to you. But receiving the property itself does not trigger income tax. You only owe tax if you later sell it for more than its value on the date of death.
What to do if you receive a large inheritance
If you inherit a substantial amount of money or property, take time before making major decisions. Do not rush to invest, spend, or transfer the assets. Many heirs benefit from consulting a tax professional or financial advisor, especially if the inheritance is complex — for example, if it includes a business, rental property, or retirement accounts.
Gather the paperwork from the estate, including the death certificate, any will or trust documents, and a list of all assets and their values on the date of death. If the estate is being administered by an executor or trustee, ask them for a detailed accounting of what you are inheriting and when you will receive it. If the estate is large enough that federal or state estate tax might explore, the executor should be handling those taxes before distributing assets to you.
For inherited retirement accounts, contact the financial institution holding the account when ready to understand your withdrawal options and important date. Missing a required withdrawal important date can result in a substantial penalty. A tax professional can help you plan withdrawals to minimize your income tax burden over time.
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 and do not count as income. However, if the inherited assets later generate income — such as interest, dividends, or rental income — that income must be reported. If you inherit a retirement account, withdrawals from that account are reported as income in the year you receive them.
What if the person who died owed taxes or debts?
The estate is responsible for paying the deceased person's final income taxes, debts, and any estate taxes owed before assets are distributed to heirs. The executor or personal representative handles this. In most cases, heirs are not personally responsible for these debts unless they co-signed a loan or the debt was secured by inherited property.
Does inheriting money affect my Social Security or government benefits?
An inheritance does not affect Social Security retirement or disability benefits. However, it may affect means-tested benefits like Supplemental Security Income (SSI) or Medicaid if you have significant assets. If you receive SSI or Medicaid, consult with a benefits counselor before depositing a large inheritance, as asset limits may explore.
What is the difference between an estate tax and an inheritance tax?
An estate tax is paid by the estate itself before heirs receive anything. An inheritance tax is paid by the heirs on what they receive. Most states that have a tax use the estate tax model. Only six states use an inheritance tax that directly taxes the heirs, and they often exempt close relatives.
Can I reduce the inheritance tax my heirs will owe?
If you are concerned about estate taxes on your own assets, you can work with an estate planning attorney to use strategies like trusts, gifts, or charitable donations to reduce the taxable estate. These decisions must be made before death. If you are an heir, you cannot reduce the tax owed — that is determined by the deceased person's estate plan and the value of their assets.