The federal government does not tax inheritance itself
There is no federal inheritance tax. When someone dies and leaves you money or property, you do not owe federal income tax on what you receive. This is the single most important fact: the person who inherits pays nothing to the IRS based on receiving an inheritance.
What exists instead is the federal estate tax, which is paid by the estate itself — the total value of everything the dead person owned — before anything is distributed to heirs. The estate tax applies only to very large estates. For deaths in 2024, the estate tax kicks in only when the total estate exceeds $13.61 million. Most people's estates fall well below this threshold, so no federal estate tax is owed at all.
The confusion between inheritance tax and estate tax is common because some states do tax inheritance directly, but the federal government does not. Your state may have its own rules, which are separate from federal law.
Key Takeaways
- The federal government does not tax money or property you inherit; there is no federal inheritance tax.
- The federal estate tax applies only to estates larger than $13.61 million as of 2024, and most estates owe nothing.
- Some states impose their own inheritance tax or estate tax on top of federal rules, so check your state's law.
- The person who dies (or their estate) pays any federal estate tax owed; the heir does not pay it.
- Inherited retirement accounts and life insurance have special tax rules that differ from other inherited property.
How the federal estate tax actually works
The federal estate tax is a tax on the estate's total value, not on what each individual heir receives. The executor of the estate — the person named in the will to handle the dead person's affairs — is responsible for filing the estate tax return (Form 706) if the estate is large enough to require one.
The estate pays the tax from its own assets before distributing money to heirs. If an estate is worth $15 million, for example, the estate itself owes tax on the $1.39 million that exceeds the $13.61 million threshold. The heirs then receive what is left after that tax is paid. The heir never writes a check to the IRS for inheritance.
The $13.61 million threshold is called the exemption amount. It changes each year based on inflation. In 2025, it is expected to be higher, but the exact figure is set by the IRS in October of the prior year. If you are managing an estate, check the IRS website for the current year's exemption before filing.
State inheritance and estate taxes are separate from federal law
Twelve states and the District of Columbia impose their own estate tax. These states are Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. The exemption amounts and tax rates vary by state and are usually lower than the federal threshold, meaning an estate might owe state tax even if it owes nothing to the federal government.
Six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — impose an inheritance tax instead of an estate tax. An inheritance tax is paid by the heir, not the estate, and the amount owed depends on the heir's relationship to the dead person. A spouse or child typically pays less or nothing, while a distant relative or unrelated person pays a higher rate. Maryland has both an estate tax and an inheritance tax.
If you inherit property in a state other than where you live, you may owe tax in that state. The rules are complex and depend on where the property is located and where the dead person lived. An estate attorney or tax professional in that state can tell you what applies to your situation.
Inherited retirement accounts and life insurance have their own rules
Inherited IRAs, 401(k)s, and other retirement accounts are not subject to the federal estate tax, but they do have income tax consequences for the heir. When you withdraw money from an inherited traditional IRA or 401(k), that withdrawal is taxable income to you in the year you take it. The amount you owe in income tax depends on your own tax bracket, not on the size of the account.
Life insurance proceeds paid to a named beneficiary are also not subject to federal estate tax, even if the policy is very large. However, if the dead person's estate is named as the beneficiary instead of a person, the insurance payout becomes part of the taxable estate and could trigger estate tax on a very large estate.
The rules for inherited retirement accounts changed significantly in 2023 under the find 2.0 Act. Most non-spouse heirs must now withdraw the entire inherited account within 10 years, which can create a large tax bill in a single year. Spouses have more flexibility and can treat the inherited account as their own. If you inherit a retirement account, speak with a tax professional or financial advisor about the withdrawal timeline that applies to you.
What triggers a federal estate tax return even if no tax is owed
An estate tax return (Form 706) must be filed if the estate's total value exceeds the exemption amount, even if the estate owes no tax. This happens when the estate is above the threshold but the dead person had made large gifts during their lifetime. Those gifts count toward the exemption, and the return documents how much of the exemption was already used.
The important date to file Form 706 is nine months after the date of death, though an extension can be requested. If the return is not filed when required, penalties and interest accrue on any tax owed. The executor should consult a tax professional or estate attorney to determine whether a return is required.
Some estates file Form 706 even when not required, to establish a higher "stepped-up basis" for inherited property. The stepped-up basis is the property's value on the date of death, and using that value can reduce capital gains tax if the heir later sells the property. This is a strategy that requires professional guidance to execute correctly.
The exemption amount is set to drop in 2026
The current $13.61 million exemption is temporary. It was increased by the Tax Cuts and Jobs Act of 2017 and is scheduled to expire on December 31, 2025. Starting January 1, 2026, the exemption is set to drop to approximately $7 million per person (adjusted for inflation), unless Congress passes new legislation to extend or change it.
This means that estates worth between $7 million and $13.61 million will owe federal estate tax starting in 2026 if no change is made. For very large estates, the difference is significant. If you are managing a large estate or expect to inherit a substantial amount, monitor tax law changes and consult a professional about timing strategies.
Congress could extend the higher exemption, lower it further, or change the tax rate itself. Tax law is set by Congress, not the IRS, so changes require legislative action. Check reliable sources like the IRS website or a tax professional for updates as 2026 approaches.
Frequently Asked Questions
Do I have to pay income tax on money I inherit?
No, inherited money itself is not subject to federal income tax. However, if the inherited money is in a retirement account like an IRA or 401(k), withdrawals from that account are taxable income. Interest, dividends, or rent earned by inherited property after you receive it is also taxable income in the year you earn it.
What if the person who died owed taxes?
The dead person's final income tax return is filed by the executor and any taxes owed come from the estate's assets. You as an heir are not personally responsible for the dead person's tax debt unless you are also the executor or you received assets that were supposed to go to paying taxes.
Do I need to report an inheritance to the IRS?
You do not report the inheritance itself on your personal tax return. If the estate files Form 706 (the estate tax return), that is filed by the executor, not by you. If you inherit a retirement account, the financial institution will send you tax documents showing distributions, which you report on your own return.
What is the difference between an estate tax and an inheritance tax?
An estate tax is paid by the estate before distribution to heirs. An inheritance tax is paid by the heir based on what they receive and their relationship to the dead person. The federal government uses an estate tax; some states use inheritance tax, estate tax, or both.
Can I reduce the estate tax by giving money away before I die?
Yes, gifts made during your lifetime count toward your lifetime exemption, but you can give up to $18,000 per person per year (in 2024) without using any of your exemption. Larger gifts use your exemption but do not create a tax bill during your lifetime. A tax professional can explain strategies for large estates, but this is complex and requires professional guidance.