Federal inheritance tax does not exist, but your state might have one, and you may owe income tax on what the inheritance earns after you receive it
The federal government does not tax money or property you inherit. You will not fill out a form or send money to the IRS because someone left you their house, bank account, or car. That is the straightforward answer.
What complicates things: some states do tax inheritance, the person whose estate you inherited from may owe taxes before the money reaches you, and anything your inheritance earns after you receive it counts as your income. The rules depend on which state you live in, which state the person who died lived in, and what type of asset you inherited.
Key Takeaways
- The federal government does not tax inheritance, so you owe nothing to the IRS on money or property you inherit.
- Six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) tax inheritance, but the rate and who pays depends on how closely you were related to the person who died.
- Interest, dividends, and rent from inherited assets count as your income and are taxable, even though the asset itself is not.
- The person's estate may owe federal taxes before the inheritance is distributed, which reduces what you receive but does not create a tax bill for you.
- You do not need to report the inheritance itself on your tax return unless it earned income during the year you received it.
Which states tax inheritance and how much
Six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax is paid by the person who inherits, not by the estate, and the rate depends on your relationship to the person who died.
Spouses and children usually pay nothing or a lower rate. More distant relatives and unrelated people pay higher rates. For example, in Pennsylvania, a spouse pays 0 percent, a child pays 4.5 percent, and an unrelated person pays 15 percent. In Iowa, a spouse and direct descendants pay nothing, but a sibling pays 5 to 10 percent depending on the amount.
If you inherited from someone in one of these states but you live elsewhere, you may still owe that state's tax. The tax applies based on where the person who died lived, not where you live. Check your state's department of revenue website to see the exact rates and which relatives are exempt.
The difference between inheritance tax and estate tax
Inheritance tax and estate tax are not the same thing, though people often mix them up. Inheritance tax is paid by the person who inherits. Estate tax is paid by the estate itself before anything is distributed to heirs.
The federal government does not have an estate tax for most people. The federal estate tax only applies if the total value of the estate exceeds a certain amount — in 2024, that threshold is $13.61 million. Very few estates are large enough to owe federal estate tax.
Some states do have estate taxes. Maryland, New Jersey, and Washington tax estates above a certain value. If the estate owes state estate tax, the money comes out of the total before heirs receive their share. You do not pay this tax yourself; the executor of the estate handles it.
Income tax on what your inheritance earns
The inheritance itself is not taxable income. But anything it earns after you receive it is. If you inherit a savings account with $50,000 and it earns $200 in interest over the year, you owe income tax on that $200. If you inherit rental property and collect rent, that rent is taxable income.
Inherited retirement accounts like IRAs and 401(k)s have special rules. You must withdraw the money according to a schedule set by federal law, and those withdrawals count as income. The rules changed in 2023 under the find Act, so if you inherited a retirement account recently, the withdrawal timeline may be shorter than it was before.
Inherited stocks and bonds work differently. You receive what is called a step-up in basis, which means the value is reset to what it was on the date of death. If you sell the stock shortly after inheriting it, you owe capital gains tax only on any increase in value after that date, not on the gain that happened while the previous owner held it.
What the executor and probate process handle
The person named to manage the estate — called the executor or personal representative — is responsible for paying any taxes the estate owes before distributing money to heirs. This includes federal income tax on income the estate earned while it was being settled, state estate taxes if applicable, and any inheritance taxes owed by heirs in states that have them.
The executor files a final income tax return for the person who died (Form 1040) and may file an estate income tax return (Form 1041) if the estate earned income. These are separate from your personal tax return. You will receive a document called a K-1 if the estate distributed income to you, and you report that on your own return.
Probate is the court process that validates the will and oversees the distribution. It can take several months to over a year depending on the state and the complexity of the estate. During that time, the executor is handling tax matters, not you.
What you need to do on your own tax return
If you inherited money or property and it did not earn income during the year you received it, you do not report the inheritance on your tax return at all. You only report income that the inheritance earned.
If the inheritance earned interest, dividends, rent, or other income, you will receive a form from the bank, investment company, or property manager showing that income. Report it on your tax return the same way you would report income from any other source. If the estate distributed income to you, you will receive a K-1 form from the executor, and you report that income as well.
Keep records of the value of inherited assets on the date of death. This becomes your cost basis for calculating capital gains tax if you sell them later. Your executor or the estate attorney should provide this information.
Inherited property and real estate
Inheriting a house or other real property does not create a tax bill. You do not owe tax on the property itself. However, if you rent it out, the rental income is taxable. If you sell it, you may owe capital gains tax on any increase in value after the date of death.
Property taxes are a separate matter from inheritance tax. You become responsible for property taxes once you own the property, but that is a local tax, not an inheritance tax. Some states offer a brief grace period before property taxes are due on inherited property, but you should contact your local assessor's office to confirm.
If you inherit a house in a state with inheritance tax and you live in a different state, you may owe inheritance tax to the state where the house is located. The executor should handle this, but confirm with them or with a tax professional in that state.
Frequently Asked Questions
Do I have to report an inheritance to the IRS?
No. The inheritance itself is not reported to the IRS. You only report income that the inheritance earns. If you inherited $100,000 in cash and did not invest it, there is nothing to report on your tax return.
What if I inherited money from someone who lived in another country?
The federal government does not tax the inheritance. However, the other country may have its own inheritance or estate tax. You should consult a tax professional who specializes in international inheritance, as rules vary widely by country.
Do I owe taxes if I inherited a 401(k) or IRA?
The inheritance itself is not taxed, but you must withdraw the money according to federal rules, and those withdrawals are taxable income. The timeline depends on your relationship to the person who died and when they died. A tax professional or the plan administrator can explain your specific withdrawal schedule.
Can I deduct inheritance taxes I paid?
Inheritance taxes paid to a state are not deductible on your federal return. Some states allow you to deduct them on your state return; check your state's tax rules.
What if the estate owes more in taxes than it has money to pay?
The executor works with creditors and the court to prioritize what gets paid. Heirs may receive less than expected, but you do not become personally responsible for the estate's debts unless you are the spouse in certain states. An estate attorney can explain your state's rules.