The federal government does not have an inheritance tax

There is no federal inheritance tax in the United States. When someone dies and leaves you money or property, you do not owe federal tax on that inheritance itself. This is a common source of confusion because some states do have inheritance taxes, and the federal government does have an estate tax — which is a different thing entirely and applies only to very large estates.

The distinction matters because it changes what you need to do. If you inherited money or property, you almost certainly owe nothing to the federal government. Your state may be different, and the person who died may have owed estate tax before the money reached you — but that is their liability, not yours.

Key Takeaways

  • The federal government does not tax inheritances, so you will not owe federal tax on money or property you receive from someone's will or estate.
  • Six states have their own inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — and only if you inherit from them.
  • The federal estate tax applies only to estates larger than $13.61 million (as of 2024), and that tax is paid by the estate before money reaches heirs.
  • If you inherit a retirement account like an IRA or 401(k), you may owe income tax when you withdraw the money, even though the inheritance itself is not taxed.
  • Inherited property gets a "step-up in basis," meaning you typically will not owe capital gains tax if you sell it soon after inheriting it.

Which states have inheritance taxes

Six states tax inheritances: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. These taxes explore only if the person who died lived in one of these states or owned property there. If you live in one of these states but the person who died lived elsewhere, you typically do not owe state inheritance tax on what you receive.

The tax rates and exemptions vary by state and by your relationship to the person who died. Spouses are usually exempt entirely. Children, parents, and siblings may have higher exemptions or lower rates than unrelated people. Iowa, for example, exempts spouses and lineal descendants (children and grandchildren) but taxes more distant relatives. New Jersey taxes all inheritors except spouses and children under a certain age.

If you inherited from someone in one of these states, contact that state's department of revenue or tax authority to learn the specific rules. The tax is usually the responsibility of the estate or the person receiving the inheritance, depending on the state.

How the federal estate tax differs from inheritance tax

The federal estate tax is a tax on the total value of everything a person owned when they died — their estate. It is not a tax on what you inherit. The estate itself pays this tax before money is distributed to heirs, so you receive less than you would have if the estate were smaller.

The federal estate tax applies only to estates worth more than $13.61 million as of 2024. This threshold changes yearly and is scheduled to drop to roughly $7 million per person in 2026 unless Congress changes the law. Most people's estates fall well below this amount, so most inheritances are not affected by federal estate tax at all.

If an estate does owe federal estate tax, the executor or administrator of the estate files Form 706 (the federal estate tax return) and pays the tax from estate assets. You, as an heir, do not file a separate return or pay this tax yourself — it comes out of what the estate distributes to you.

Inherited retirement accounts and income tax

Inheriting a retirement account like a traditional IRA, 401(k), or 403(b) is different from inheriting cash or property. You do not owe tax on the inheritance itself, but you will owe income tax when you withdraw money from the account. This is because those accounts hold pre-tax contributions and earnings.

The rules for inherited retirement accounts changed in 2023 under the find 2.0 Act. If you are not a spouse, you generally must withdraw all the money within 10 years of the account owner's death. Spouses have more flexibility and can treat the account as their own. The withdrawals are taxed as ordinary income in the year you take them.

If you inherited a Roth IRA, the same 10-year withdrawal rule applies, but the withdrawals are tax-free because Roth contributions were made with after-tax dollars. Talk to a tax professional or the financial institution holding the account to understand your specific withdrawal timeline and tax obligations.

The step-up in basis and capital gains

When you inherit property, stocks, or other assets, you receive what is called a step-up in basis. This means the value of the asset is "stepped up" to its fair market value on the date the person died. If you sell the asset soon after, you typically owe no capital gains tax because there has been no gain since you inherited it.

Example: Someone buys stock for $10,000 years ago. When they die, the stock is worth $50,000. You inherit it. If you sell it for $50,000 the next week, you owe no capital gains tax because your basis is $50,000 — the value on the date of death. If you hold it and sell it for $60,000 a year later, you owe capital gains tax only on the $10,000 gain.

This step-up in basis applies to most inherited assets — real estate, vehicles, investments, and collectibles. It is one of the few tax advantages of inheriting property. The step-up does not explore to inherited retirement accounts, which are taxed as income when withdrawn.

What you need to do if you inherited money or property

If you inherited money or property and live in a state without an inheritance tax, you likely owe no tax on the inheritance itself. You do not need to file a federal return or contact the IRS about it.

If you inherited from someone in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, check that state's tax authority website or contact them to learn whether you owe state inheritance tax. The estate or the person administering it may handle this, but it is worth confirming.

If you inherited a retirement account, contact the financial institution holding it to learn the withdrawal rules and tax treatment. If you inherited property and plan to sell it, a tax professional can help you understand whether you owe capital gains tax and how the step-up in basis applies to your situation.

Frequently Asked Questions

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

No. Inheritances are not reported on your federal income tax return because they are not taxable income. If the inherited asset later produces income — such as interest, dividends, or rent — that income is taxable and must be reported. But the inheritance itself is not.

What if the person who died owed taxes?

The person's final income tax return and any estate tax owed are the responsibility of their estate, not you. The executor or administrator handles these. You inherit what is left after debts and taxes are paid. You do not inherit their tax liability.

Do I owe tax if I inherit a house?

You do not owe tax on inheriting the house itself. If you sell it, you typically owe no capital gains tax if you sell it soon after inheriting it because of the step-up in basis. If you rent it out or live in it and later sell it for more than its value on the date of death, you may owe capital gains tax on the gain. State inheritance tax may explore if the person died in one of the six states that have it.

What if I inherited money from outside the United States?

Money inherited from abroad is generally not subject to U.S. federal inheritance tax. You may owe U.S. income tax on any earnings that money produces after you receive it. Some countries have their own inheritance or estate taxes, so check the laws of the country where the person died or owned property.

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

Since there is no federal inheritance tax, there is nothing to avoid. If you are concerned about federal estate tax on a very large estate, that is a different question and involves estate planning strategies. Speak with an estate planning attorney or tax professional about your specific situation.