Federal inheritance tax does not exist, but your state may have one

The United States has no federal tax on money or property you receive from someone's estate. The person who died may have owed federal estate tax before the money was distributed, but that is paid from the estate itself—not by you as the person receiving it.

However, twelve states and the District of Columbia do tax inheritances. The amount you owe depends on which state the person who died lived in, your relationship to them, and how much you received. A spouse or child in most of these states pays nothing. A distant relative or unrelated person may pay between 4 and 18 percent.

If the person died in a state with no inheritance tax, you owe nothing to that state. If they died in one of the twelve states that tax inheritances, you will receive a notice from that state's tax authority with instructions on what to report and when payment is due.

Key Takeaways

  • The federal government does not tax inheritances, so most people who receive money from an estate owe no federal tax on it.
  • Twelve states tax inheritances, but spouses and children usually pay zero tax in those states.
  • The tax rate and what you owe depends on your relationship to the person who died and the state where they lived.
  • You will receive a bill from the state tax authority if you owe inheritance tax; you do not have to report it on your federal return.

Which states have inheritance tax

Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee tax inheritances. Delaware, Illinois, Maine, and Ohio also have inheritance taxes, though some are being phased out. The District of Columbia taxes inheritances as well.

If the person who died lived in any other state, no state inheritance tax is owed. The state where you live does not matter—only the state where the person who died lived at the time of death.

How much you pay depends on your relationship to the person who died

In every state with an inheritance tax, spouses pay zero tax. Children and grandchildren usually pay zero tax as well, though a few states tax grandchildren at a reduced rate. Parents and siblings pay a lower rate than distant relatives or people with no family relationship.

In Pennsylvania, for example, a spouse or child pays nothing. A parent, grandparent, or sibling pays 4.5 percent. A niece, nephew, or cousin pays 12 percent. An unrelated person pays 15 percent. New Jersey's rates are similar, though the thresholds for when you start paying are different.

Each state sets its own brackets and rates. If you received an inheritance and the person lived in one of these twelve states, the state tax authority will send you a notice with the exact amount you owe based on your relationship and the value of what you received.

How much you pay depends on the size of the inheritance

Most states with inheritance tax set a threshold—an amount below which you owe nothing. In Iowa, you pay nothing on the first $25,000 you inherit from a sibling. In Kentucky, the threshold for a sibling is $1,000. In Maryland, there is no threshold for siblings, but there is one for more distant relatives.

Once you exceed the threshold, you pay a percentage of the amount over that threshold. The percentage varies by state and by your relationship to the person who died. Some states use a sliding scale, so the rate increases as the amount increases.

The state tax authority will calculate this for you and send you a bill. You do not have to figure it out yourself.

Income tax on inherited money is usually zero

Money you inherit is not considered income for federal tax purposes, so you do not report it on your federal tax return and you do not owe federal income tax on it. This is true whether you inherit cash, investments, real estate, or personal property.

The exception is money in certain retirement accounts. If you inherit a traditional IRA or a 401(k), you will owe income tax on the withdrawals you make from that account. The tax is paid when you withdraw the money, not when you inherit it. Roth IRAs have different rules and may not be taxable.

If the inherited money is in a regular savings or investment account, you owe no income tax on the inheritance itself. You may owe capital gains tax later if you sell inherited investments at a profit, but that is a separate issue from the inheritance tax.

What happens if you do not pay inheritance tax

If you owe inheritance tax and do not pay, the state tax authority will send you notices and may charge penalties and interest. The amount owed grows over time. In some cases, the state can place a lien on property you own or pursue collection through the court system.

If you received a notice and believe you do not owe the tax—for example, because you are a spouse or child and should be exempt—you can contact the state tax authority to dispute it. Bring documentation of your relationship to the person who died, such as a birth certificate or marriage certificate.

Frequently Asked Questions

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

No. Inheritances are not reported on your federal tax return and are not subject to federal income tax. The only exception is money you withdraw from inherited retirement accounts like traditional IRAs, which is taxable when you withdraw it.

What if the person who died lived in a state with no inheritance tax but I live in a state that has one?

You owe nothing. Inheritance tax is based on where the person who died lived, not where you live. If they lived in a state without inheritance tax, you have no state inheritance tax to pay.

Do I have to pay inheritance tax on a house or car I inherited?

In states with inheritance tax, yes—the value of real estate, vehicles, and other property is included in the inheritance and taxed the same way as cash. The state tax authority will determine the fair market value of the property for tax purposes.

Can I deduct inheritance tax on my federal return?

No. Inheritance tax paid to a state is not deductible on your federal income tax return. However, you may be able to deduct it on your state income tax return if your state allows it—check with your state tax authority.

What if I inherited money years ago and did not know I owed tax?

Contact the state tax authority where the person who died lived. They can tell you whether you still owe tax and what the current amount is with any penalties and interest. Many states offer payment plans if you cannot pay the full amount at once.