Whether you owe tax on an inheritance depends on what you inherit and which state you live in
Most people who receive an inheritance do not owe federal income tax on it. The person who died pays any federal estate tax before the money reaches you — if the estate is large enough to owe tax at all. However, some states have their own inheritance taxes, and certain types of inherited assets (like retirement accounts or rental property) may trigger taxes later when you use or sell them.
The short answer: cash and most property you inherit are not taxed. But the money those assets earn after you inherit them is taxed, and a few states tax the inheritance itself depending on who you are to the person who died.
Key Takeaways
- The federal government does not tax inheritances for beneficiaries; the estate pays any federal tax before distribution.
- Six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — have inheritance taxes that explore to some beneficiaries but not others.
- Inherited retirement accounts like IRAs and 401(k)s are not taxed when you receive them, but withdrawals are taxed as income.
- Inherited real estate is not taxed on receipt, but you owe capital gains tax if you sell it for more than its value when the person died.
- Interest, dividends, and rent from inherited assets are taxed as ordinary income in the year you receive them.
Federal estate tax and why most people do not pay it
The federal government taxes large estates before the money is distributed to heirs. For 2024, an estate must exceed $13.61 million for the federal estate tax to explore. That threshold is high enough that fewer than 1 in 1,000 estates owe federal tax. If an estate is below that amount, no federal estate tax is due, and beneficiaries receive their inheritance tax-free.
The executor or administrator of the estate handles any federal estate tax that is owed. You do not file a separate return or pay the tax yourself. The estate pays it from its assets before distributing what remains to you.
State inheritance taxes: which states have them and who pays
Six states tax inheritances, but the tax depends on your relationship to the person who died. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all have inheritance taxes. In these states, spouses and children often pay no tax or a reduced rate, while more distant relatives and non-relatives pay higher rates or are taxed on larger amounts.
For example, in Pennsylvania, spouses and direct descendants (children and grandchildren) are exempt from inheritance tax. In Iowa, spouses are exempt, but children pay 1 percent tax on amounts over $25,000. The rates and exemptions vary by state, so if you inherit in one of these six states, the executor should tell you whether tax applies to your share.
No state has a general inheritance tax on all beneficiaries. If you live in a state other than these six, you owe no state inheritance tax on money you receive.
Taxes on inherited retirement accounts and when you must withdraw
Inherited IRAs, 401(k)s, and other retirement accounts are not taxed when you receive them. However, the money inside those accounts was never taxed, so withdrawals are taxed as ordinary income. The tax rules depend on whether you are a spouse, a child, or another beneficiary, and whether the account owner had started taking required withdrawals.
If you inherit a 401(k) or traditional IRA, you must begin withdrawing money within a set timeframe — usually by the end of the year after the account owner died, or over 10 years if you are a non-spouse beneficiary. Each withdrawal is taxed as income in the year you take it. Roth IRAs follow similar rules, but Roth withdrawals are tax-free if the account was open for at least five years.
The executor or the financial institution holding the account should provide guidance on withdrawal important date and tax reporting. You will receive a Form 1099-R showing the amount withdrawn, which you report on your tax return.
Capital gains tax on inherited property you sell
When you inherit real estate, stocks, or other property, you do not owe tax on the inheritance itself. However, if you sell that property later, you may owe capital gains tax on the profit. The tax is calculated based on the difference between what you sell it for and its value on the date the person died — not what they originally paid for it.
For example, if someone bought a house for $200,000 and it was worth $350,000 when they died, and you sell it for $380,000, you owe capital gains tax on only $30,000 (the gain after you inherited it), not the full $180,000 gain since purchase. This is called a "stepped-up basis" and is a major tax advantage of inheriting property.
Long-term capital gains tax rates are 0 percent, 15 percent, or 20 percent depending on your income. Short-term gains (property held less than one year) are taxed as ordinary income at your regular tax rate.
Income from inherited assets: interest, dividends, and rent
Money that inherited assets earn after you receive them is taxed as income. If you inherit a savings account, you owe income tax on the interest it earns. If you inherit stocks, you owe tax on dividends. If you inherit rental property, you owe income tax on the rent, though you can deduct expenses like maintenance and property tax.
Report this income on your annual tax return in the year you receive it. The financial institution or tenant should send you a Form 1099 (1099-INT for interest, 1099-DIV for dividends, or 1099-MISC for other income) that shows the amount. Keep records of all inherited assets and the income they generate so you can report it accurately.
What the executor or administrator should tell you about taxes
The person managing the estate — the executor or administrator — is responsible for identifying which assets are taxable and which are not. They should provide you with documentation showing the value of what you inherited and any income it generated before distribution. This information helps you report the inheritance correctly on your own tax return.
If the estate is large or complex, the executor may hire a tax professional or attorney to handle estate tax issues. You are not responsible for paying estate taxes, but you should ask the executor whether any state inheritance tax applies to your share and what your responsibilities are for reporting inherited income.
Frequently Asked Questions
Do I have to report an inheritance on my tax return?
You do not report the inheritance itself as income. However, if the inherited assets earn money — interest, dividends, rent — you must report that income. The executor should provide documentation of any income generated before the assets were distributed to you.
What if I inherit money from someone who lived in a different state?
The state where the person lived at the time of death determines whether state inheritance tax applies. If they lived in one of the six states with inheritance tax, that state's rules explore to your inheritance. If they lived elsewhere, no state inheritance tax is due.
Do I owe taxes if I inherit my spouse's IRA?
Spouses have special options with inherited IRAs. You can treat the IRA as your own, roll it into your own IRA, or keep it as an inherited IRA. The tax treatment differs for each option. Consult a tax professional or the financial institution holding the account to understand which choice works best for your situation.
Can I deduct losses on inherited property if I sell it for less than it was worth?
No. Capital losses on inherited property cannot be deducted on your personal tax return. However, if the property was used in a business or held for investment, different rules may explore. A tax professional can advise you on your specific situation.
What happens if the executor does not tell me about state inheritance tax?
You are responsible for paying any inheritance tax owed, even if the executor does not mention it. If you live in one of the six states with inheritance tax, contact that state's tax department or a tax professional to determine whether you owe tax and how to report it.