Federal tax on inheritance depends on the estate size, not the amount you receive
The federal government does not tax what you inherit. Your relative's estate — the total value of everything they owned — may owe tax before money reaches you, but you do not report the inheritance itself as income on your tax return. The tax is paid by the estate, not by you as the person receiving it.
Whether the estate owes tax at all depends on how much it was worth. In 2024, estates under $13.61 million owe no federal tax. Estates larger than that pay tax only on the amount above the threshold. Most people never deal with this because most estates fall below the limit.
Your state may have its own inheritance or estate tax, which works differently and can affect what you receive. The rules vary significantly by state.
Key Takeaways
- You do not pay federal income tax on money or property you inherit, regardless of the amount.
- The estate itself may owe federal tax if it exceeds $13.61 million in 2024, but this threshold is high enough that most estates pay nothing.
- Some states charge an inheritance tax (paid by the person who inherits) or an estate tax (paid by the estate), and the rates and thresholds vary by state.
- The person managing the estate — the executor — handles any tax filing and payment before distributing money to heirs.
- You should ask the executor whether your state has an inheritance tax and whether the estate is large enough to trigger it.
When the federal estate tax actually applies
Federal estate tax kicks in only when an estate is worth more than the exemption amount. For 2024, that exemption is $13.61 million per person. A married couple can combine their exemptions, so a joint estate can be worth up to $27.22 million before owing federal tax.
These numbers change each year. The exemption is scheduled to drop significantly in 2026 unless Congress acts. If you are inheriting from a very large estate, the executor should be tracking these changes and consulting a tax professional.
When an estate does owe federal tax, the rate is 40 percent on the amount above the exemption. So if an estate is worth $14 million, only the $390,000 above the threshold is taxed, and the tax owed would be $156,000. The executor pays this from the estate before distributing the remainder to heirs.
State inheritance and estate taxes
Twelve states and the District of Columbia have their own estate taxes. These work similarly to the federal tax — they explore to the total estate value, not to individual inheritances. The exemption thresholds are much lower than the federal level, ranging from $1 million to $5.9 million depending on the state. Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee charge inheritance tax instead, which is paid by the person who receives the money.
Inheritance tax rates and exemptions vary. Some states exempt spouses and children entirely. Others tax distant relatives or non-relatives at higher rates. Pennsylvania, for example, taxes direct descendants at 4.5 percent but taxes siblings at 12 percent and unrelated people at 15 percent.
If you inherit from someone who lived in a state with an inheritance or estate tax, the executor should inform you whether you owe anything. You will receive a statement showing what you inherited and what tax, if any, was withheld or is due.
What happens if the estate owes tax
The executor — the person named in the will or appointed by the court to manage the estate — is responsible for filing any required tax returns and paying what is owed. This happens before the estate is distributed to heirs. The executor uses money from the estate to pay the tax bill.
If the estate does not have enough liquid money to pay the tax, the executor may need to sell assets like real estate or investments. This can reduce what each heir receives. The executor should explain this to heirs if it happens.
You do not file a separate tax return for the inheritance. The executor files the estate's tax return (Form 706 for federal estate tax, or the equivalent state form). Once the tax is paid, you receive your share of what remains.
Inherited retirement accounts and investment accounts
Money in inherited retirement accounts like IRAs and 401(k)s has special rules. You do not owe income tax when you inherit the account, but you will owe tax when you withdraw the money. The tax rate depends on your own income tax bracket, not on the size of the inheritance.
The rules for how quickly you must withdraw the money changed in 2023. If you inherited an IRA from someone who was not your spouse, you generally must withdraw all the money within 10 years. If you inherited a 401(k), your employer's plan documents determine the timeline. Withdrawals are taxed as ordinary income.
Inherited investment accounts (brokerage accounts, not retirement accounts) get a "step-up in basis." This means the value is reset to what it was on the date of death. If your relative bought stock for $10,000 and it was worth $50,000 when they died, you inherit it at the $50,000 value. If you sell it when ready, you owe no capital gains tax. This step-up applies only at death, not to gifts made while someone is alive.
Inherited real estate and property
You do not owe income tax on inherited real estate. Like other inherited property, it receives a step-up in basis to its value on the date of death. If you sell the property later, you owe capital gains tax only on the increase in value after you inherited it, not on the appreciation that happened while your relative owned it.
If the inherited property is rental real estate or a business, the rules become more complex. You may owe income tax on rental income or business income going forward, but not on the property itself. Consult a tax professional if you inherit a rental property or business.
Some states charge property transfer tax when real estate changes hands through inheritance. This is separate from income tax and is usually paid by the estate or the heir. The amount varies by state and sometimes by county.
What you should do with inheritance tax information
Ask the executor whether your state has an inheritance or estate tax. If it does, ask whether the estate is large enough to trigger it and whether any tax will be withheld from your inheritance. Request a written statement showing the value of what you inherited and any tax paid on your behalf.
If you inherited a retirement account, ask the executor or the financial institution holding the account what your withdrawal timeline is and what tax withholding options are available. If you inherited real estate, ask whether there are any property transfer taxes owed.
Keep records of the date of death and the value of everything you inherited. You will need this information if you later sell inherited property or if the IRS questions your tax return.
Frequently Asked Questions
Do I have to report my inheritance on my tax return?
No. Inheritances are not reported as income on your federal tax return. You report only income you earn or receive as interest, dividends, or capital gains. If the executor withheld tax from your inheritance, you should receive a statement showing that, but you do not file a separate form for the inheritance itself.
What if I inherited money from someone who lived in another country?
The United States taxes the worldwide estate of U.S. citizens and residents, regardless of where they lived or where the property is located. Non-residents are taxed only on U.S. property. The rules are complex, and the executor should consult a tax professional familiar with international estates.
Can I reduce the tax my estate owes by giving money away before I die?
Yes, but there are limits. You can give up to $18,000 per person per year (in 2024) without using any of your lifetime exemption. Larger gifts use up your exemption, which reduces how much you can pass tax-free when you die. A tax professional can help you plan this if you have a large estate.
What if the executor does not pay the estate tax?
The IRS can pursue the executor personally for unpaid tax. Heirs can also be held liable for unpaid estate tax up to the value of what they inherited. If you suspect the executor is not handling taxes correctly, consult a lawyer.
Is there a time limit for the IRS to audit an estate tax return?
The IRS generally has three years from the filing date to audit an estate tax return, but it can be longer if there is substantial underreporting. The executor should keep all estate records for at least seven years.