The federal government does not tax most inheritances
Most people who receive an inheritance pay no federal tax on it. The federal estate tax is paid by the estate itself before money reaches heirs, and it only applies to very large estates. For 2024, an estate must exceed $13.61 million for the federal tax to kick in at all. If you inherited money or property and the total estate was smaller than that, you owe nothing to the IRS on the inheritance itself.
What you may owe tax on is the income the inheritance generates after you receive it. If you inherit a house and rent it out, you pay tax on the rental income. If you inherit a brokerage account and it earns dividends, you pay tax on those dividends. But the inheritance transfer itself is not taxable income to you.
Some states do have inheritance taxes, which are different from the federal estate tax and work differently depending on where you live and your relationship to the person who died. Federal tax is what applies everywhere.
Key Takeaways
- The federal estate tax only applies to estates larger than $13.61 million in 2024, so most inheritances are not subject to it.
- You do not report an inheritance as income on your federal tax return unless it generates income after you receive it.
- Income from inherited property—such as rental income, interest, or dividends—is taxable and must be reported.
- Some states impose their own inheritance or estate taxes with different rules and thresholds than federal tax.
- The person who died's estate may have owed federal tax, but that is settled before heirs receive their share.
When the federal estate tax actually applies
The federal estate tax threshold changes each year. In 2024, it is $13.61 million per person. This means an estate must be worth more than $13.61 million for any federal estate tax to be owed. If someone dies with a $10 million estate, no federal estate tax is due. If they die with a $15 million estate, tax is owed only on the amount above $13.61 million.
The threshold is set to drop significantly after 2025. Unless Congress changes the law, it will fall to roughly $7 million per person in 2026. This affects very few people—fewer than 0.1% of estates in the United States are large enough to owe federal estate tax in any given year.
The executor or administrator of the estate is responsible for calculating and paying any federal estate tax owed. This happens before the remaining money is distributed to heirs. You, as an heir, do not file a separate form or pay the tax yourself unless you are the executor.
Income you earn from inherited assets is taxable
Once you own an inherited asset, any income it produces is taxable to you. If you inherit a rental property, you report the rent as income and can deduct expenses like repairs and property tax. If you inherit a savings account, interest earned after the date of death is taxable income to you. If you inherit stocks and they pay dividends, those dividends are taxable.
There is one important exception: inherited assets receive what is called a stepped-up basis. This means the value of the asset is "reset" to what it was worth on the date of death. If someone bought a stock for $50 and it was worth $200 when they died, your basis is $200. If you sell it when ready for $200, you owe no capital gains tax. This applies to real estate, stocks, bonds, and most other property. It does not explore to retirement accounts like IRAs or 401(k)s, which have their own rules.
You should receive a document from the estate showing the date-of-death value of each asset you inherited. Keep this for your records, because you will need it if you eventually sell the asset.
Inherited retirement accounts have different rules
Inherited IRAs, 401(k)s, and other retirement accounts do not receive a stepped-up basis. Instead, the rules depend on your relationship to the person who died and when they died. If you inherited a retirement account, the money inside is still tax-deferred, but you will owe income tax when you withdraw it.
The rules changed significantly for accounts inherited after 2019. In most cases, you must withdraw the entire balance within 10 years. The withdrawals are taxed as ordinary income. Some people—spouses, minor children, and those within 10 years of the account owner's age—have different options and should speak with a tax professional about their specific situation.
Because retirement account withdrawals can push you into a higher tax bracket, it is worth planning the timing of withdrawals with a tax advisor if the account is large.
State inheritance and estate taxes vary widely
Twelve states and the District of Columbia have their own estate or inheritance taxes. These are separate from the federal tax and have lower thresholds. Some states tax the estate itself (like the federal system), while others tax the heir based on what they receive and their relationship to the deceased.
In states with inheritance tax, spouses are often exempt, but adult children and other heirs may owe tax. The rates and thresholds vary significantly. For example, some states exempt inheritances under $100,000, while others tax all inheritances above a much lower amount. If you inherited property in a state other than where you live, or if you live in a state with an inheritance tax, you may need to file a state return even if you owe no federal tax.
Check your state's tax department website or speak with a tax professional if you inherited in a state known to have an inheritance or estate tax. The rules are specific to each state and depend on your relationship to the person who died.
What to do if you inherited a large estate
If the estate is large enough that federal estate tax might explore (over $13.61 million in 2024), the executor should work with an estate tax attorney or CPA. The executor files Form 706, the federal estate tax return, with the IRS. This happens regardless of whether tax is actually owed—the form must be filed to document the estate's value and claim the exemption.
As an heir, you will receive a document called a Schedule K-1 or similar statement showing your share of any income the estate earned while it was being settled. You report this on your own tax return. You will also receive documentation of the date-of-death value of assets you inherited, which you need for your records.
If you are unsure whether you need to report something on your tax return, the safest approach is to consult a tax professional. Many offer free initial consultations, and the cost is often far less than the risk of filing incorrectly.
Frequently Asked Questions
Do I have to report an inheritance on my tax return?
No, the inheritance itself is not reported as income. However, if the estate earned income while being settled, you report your share of that income on Schedule K-1. And if the inherited asset later produces income—rent, interest, dividends—you report that income in the year you receive it.
What if I inherited money from a life insurance policy?
Life insurance proceeds paid to a named beneficiary are not taxable income to you, whether the policy was large or small. However, if the policy earns interest before being paid out, that interest may be taxable. The insurance company will tell you if any portion is taxable.
Can I avoid inheritance tax by giving money away before I die?
That is a question for an estate planning attorney, not a tax guide. The rules around gifts, trusts, and tax planning are complex and depend on your specific situation. An attorney can explain what options exist in your state.
Do I owe tax if I inherited a house?
No tax on the inheritance itself. If you live in the house, you owe no tax. If you rent it out, you report the rental income and can deduct expenses. If you sell it, you may owe capital gains tax on the increase in value since the date of death—but the stepped-up basis usually means there is little or no gain to tax if you sell soon after inheriting.
What if the person who died owed taxes?
The estate pays the deceased person's final income tax return before distributing money to heirs. You are not responsible for their tax debt unless you are the executor or you inherited property subject to a lien. The executor handles this as part of settling the estate.