The federal government does not tax most inheritances

The United States has no federal inheritance tax. When someone dies and leaves you money or property, you do not owe federal tax on what you receive. This is the rule for nearly all inheritors.

The estate itself — the total value of everything the person left behind — may owe federal tax before the money is distributed to heirs, but only if the estate is very large. For 2024, the federal estate tax applies only to estates worth more than $13.61 million. Most people's estates fall well below this threshold, so no federal tax is due at all.

The confusion often comes from the fact that some states do tax inheritances, and the rules vary widely by location. Your tax bill depends on where you live and where the person who died lived, not on federal law.

Key Takeaways

  • The federal government does not tax inheritances for the person receiving them, regardless of the amount.
  • Six states have an inheritance tax that applies to certain heirs, with rates ranging from 1 percent to 18 percent depending on the state and your relationship to the deceased.
  • Twelve states have an estate tax that is paid by the estate before money reaches heirs, with exemptions ranging from $1 million to $6.94 million depending on the state.
  • You owe no inheritance or estate tax if you live in a state without one, even if the person who died lived in a state that has one.
  • The relationship between you and the deceased matters: spouses and children often pay nothing or lower rates, while distant relatives and unrelated people may pay the full rate.

Which states have inheritance tax

Six states tax inheritances: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax is paid by the person who receives the inheritance, not by the estate.

The amount you owe depends on your relationship to the person who died. Spouses are almost always exempt — they pay nothing. Children and grandchildren usually pay nothing or a reduced rate. Parents, siblings, and more distant relatives pay higher rates. Unrelated people (friends, unmarried partners) typically pay the highest rate or are not allowed to inherit at all without tax consequences.

Rates vary by state. In Iowa, the top rate is 18 percent. In Kentucky, it is 16 percent. In Maryland, New Jersey, and Pennsylvania, rates range from 0 to 15 percent depending on the relationship. Nebraska's top rate is 18 percent. The amount of the inheritance also matters — most states have thresholds below which no tax is owed, and these thresholds are higher for close relatives.

If you live in one of these six states and inherit money, you will owe tax on that inheritance. If you live outside these states, you owe nothing to your state, even if the person who died lived in an inheritance tax state.

Which states have estate tax

Twelve states and the District of Columbia have an estate tax. This is different from inheritance tax: the estate pays the tax before money is distributed to heirs, not the heirs themselves. The states are Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington, plus DC.

Estate tax applies only to estates above a certain value. These exemption thresholds are much lower than the federal threshold. Connecticut exempts estates under $12.92 million. Delaware exempts estates under $5.7 million. Hawaii exempts estates under $5.49 million. Illinois exempts estates under $4 million. Maine exempts estates under $6.94 million. Maryland exempts estates under $5.75 million. Massachusetts exempts estates under $1 million. Minnesota exempts estates under $3 million. New York exempts estates under $6.94 million. Oregon exempts estates under $1 million. Rhode Island exempts estates under $1.63 million. Vermont exempts estates under $2.75 million. Washington exempts estates under $2.193 million. DC exempts estates under $5.75 million.

If the estate is above the threshold, the estate pays tax on the amount over the exemption. Rates range from 3.6 percent to 20 percent depending on the state. The heirs receive what is left after the estate tax is paid.

How the federal estate tax works

The federal estate tax is a tax on the estate itself, not on the people who inherit. It applies only to estates worth more than $13.61 million in 2024. The rate is 40 percent on the amount over the exemption.

Because the exemption is so high, very few estates owe federal tax. The exemption is scheduled to drop to $7 million per person in 2026 unless Congress changes the law, which would affect more estates. For now, if the estate is under $13.61 million, no federal estate tax is owed.

The person handling the estate (the executor) is responsible for filing the federal estate tax return if one is required. This does not affect what you receive as an heir — the tax is paid from the estate's assets before distribution.

Income tax on inherited money and property

Inherited money itself is not taxable income. You do not report it on your federal income tax return. The same is true for inherited property — you do not owe income tax on the property itself when you receive it.

However, if the inherited property generates income after you receive it, that income is taxable. If you inherit a rental house, the rent you collect is taxable income. If you inherit a stock portfolio, any dividends are taxable income. If you inherit a savings account and it earns interest, that interest is taxable income. The inheritance itself is not taxed, but what it earns after you own it is.

You also get a "step-up in basis" on inherited property. This means the property's value is reset to what it was worth on the date of death. If you later sell the property, you owe capital gains tax only on the increase in value from that date forward, not on any increase that happened while the previous owner held it. This can result in significant tax savings.

What happens if you inherit from someone in a different state

Your state of residence determines whether you owe inheritance tax on what you receive. If you live in a state without inheritance tax, you owe nothing, even if the person who died lived in a state with inheritance tax.

If you live in an inheritance tax state and the person who died lived elsewhere, you still owe inheritance tax on what you receive. The state where you live taxes your inheritance.

Estate tax is more complicated. If the person who died lived in a state with estate tax, that state may tax the estate even if you live elsewhere. The estate is responsible for paying this tax before distributing money to heirs. If you live in an estate tax state and the person who died lived elsewhere, your state generally does not tax the estate unless the person owned property in your state.

Frequently Asked Questions

Do I have to pay federal tax on an inheritance?

No. The federal government does not tax inheritances for the person receiving them. The only federal tax that might explore is the estate tax, which is paid by the estate if it is worth more than $13.61 million in 2024. Most estates are far below this amount.

What if I inherit a house?

You do not owe tax on receiving the house. If you sell it later, you may owe capital gains tax on the increase in value since the date of death, but not on the full sale price. If you keep the house and rent it out, the rent you collect is taxable income.

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

You do not report the inheritance itself on your federal income tax return. If the inheritance generates income (rent, interest, dividends), you report that income. If you live in an inheritance tax state, you may need to file a separate inheritance tax return with that state.

Can I avoid inheritance tax by giving money away before I die?

This is a strategy some people use for federal estate tax planning, but the rules are complex and depend on the amount and timing. For inheritance tax states, the rules vary. Consult a tax professional or estate attorney if you are concerned about this.

What if the person who died did not have a will?

The state's intestacy laws determine who inherits. This does not change whether inheritance or estate tax is owed — the tax rules are the same regardless of whether there was a will.