Inheritance Tax: Do You Pay Tax on What You Inherit?

If you have inherited money and are wondering what you owe, the answer is usually nothing. There is no federal inheritance tax, and the IRS does not treat an inheritance as taxable income. A few states tax the person receiving, and the closest family is normally exempt even there. The real tax bills that do arrive come from two specific places, neither of which is the inheritance itself: inherited retirement accounts, and income the money earns after you receive it. This page separates what is taxed from what is not.

The Short Answer

• No federal inheritance tax exists. The IRS does not include an inheritance in your income.
• Only a handful of states tax the recipient. Spouses and close family are exempt or lightly taxed in all of them.
• Iowa repealed its inheritance tax for deaths from 1 January 2025. Most published lists still include it.
• Inherited assets get a new cost basis equal to their value on the date of death, which quietly erases a lifetime of capital gains.
• Inherited traditional retirement accounts are the exception, and they are fully taxable as ordinary income when withdrawn. Most non-spouse beneficiaries must empty the account within 10 years.
• Life insurance paid because someone died is generally not taxable.

There Is No Federal Inheritance Tax

The US federal government has never taxed the person receiving an inheritance. It taxes the estate, before anything is distributed, and only when the estate is very large. By the time money reaches you, any federal tax has already been settled.

The IRS states the position plainly in Publication 525: in most cases, property you receive as a gift, bequest or inheritance is not included in your income. That covers cash, a house, shares, a car, jewellery and the proceeds of a life insurance policy paid because the insured died.

So if a parent leaves you $400,000, you report nothing and you owe nothing, at any level of the federal system. There is no threshold at which that changes for you personally, because the tax never falls on you in the first place.

What Is Actually Taxed

Four things can generate a bill. Nothing else usually does.

That last row catches people out. If your father had earned a final commission, or held a savings bond with accrued interest, and died before receiving it, that money is income in respect of a decedent. It is taxed to whoever receives it, it keeps the character it would have had for him, and it does not get the basis step-up described next.

The Rule That Saves Heirs the Most Money

This matters far more to ordinary families than the estate tax ever will, and many people inherit without knowing it exists.

When you inherit a capital asset, your cost basis resets to the asset's fair market value on the date of death. The IRS sets this out in Publication 551. The appreciation that happened during the deceased person's lifetime is never taxed as income, to them or to you.

Two practical points follow.

• Selling soon after death usually means almost no tax. The asset has had little time to move away from its date-of-death value, so the taxable gain is small.
• Any gain is automatically long term. Publication 559 is explicit: if you sell inherited property that is a capital asset, the gain or loss is considered long term regardless of how long you held it. You get the lower long-term capital gains rates even if you sell the week after probate closes.

One caveat worth knowing. If the estate filed a federal estate tax return, the executor should send you a Schedule A on Form 8971 reporting the value used, and certain beneficiaries are required to use that figure as their basis. If no such schedule arrives, keep evidence of the date-of-death value, such as an appraisal or the closing prices on that day. You will need it whenever you eventually sell.

Inherited Retirement Accounts

This is where the real tax bill usually lives. A traditional IRA or 401(k) was never taxed going in, so it gets taxed coming out, and inheriting one does not change that. There is no step-up in basis on a retirement account.

Every dollar you withdraw from an inherited traditional account is ordinary income, added on top of your salary, at your own tax bracket. Inheriting a $500,000 IRA while working is a very different event from inheriting $500,000 in a brokerage account.

The withdrawal timetable changed for deaths after 2019, and the current rules are:

• The 10-year rule. A beneficiary who is not taking life expectancy payments must withdraw the entire balance by 31 December of the year containing the tenth anniversary of the owner's death. The IRS gives the example directly: an owner who died in 2025 means the account must be fully distributed by 31 December 2035.
• Eligible designated beneficiaries get better treatment. The IRS defines these as the owner's surviving spouse, the owner's minor child, a disabled individual, a chronically ill individual, or any other individual who is not more than 10 years younger than the owner. They can generally stretch withdrawals over their life expectancy instead.
• If the owner had already started required distributions, a beneficiary who is not an eligible designated beneficiary has to do both: keep taking an annual amount and empty the account inside the 10 years.
• An inherited Roth IRA still has a clock. The IRS applies the rules as though a Roth owner always died before their required beginning date, so the 10-year deadline applies but no annual withdrawal is forced inside it. Qualified distributions remain tax free, which makes emptying a Roth in year ten the usual play.

The practical consequence of the 10-year rule is a planning problem rather than a filing one. Ten years of compressed withdrawals can push you into a higher bracket, so spreading them across the decade usually beats taking a lump sum, especially around retirement when your own income changes.

Our full guide to inherited IRA rules works through when annual required minimum distributions apply inside that 10-year window, how to calculate one from the IRS Single Life Table, and the spousal options nobody else gets.

The States That Tax the Recipient

A state inheritance tax is charged to the person receiving, and the rate depends on how closely related you were. It has nothing to do with the size of the estate, and everything to do with who you are.

Iowa no longer belongs on this list. The Iowa Department of Revenue states it directly: Iowa inheritance tax is not applicable for deaths occurring on or after 1 January 2025. Many articles and comparison tables have not caught up, so if you are reading elsewhere that Iowa taxes inheritances, check the date on the page.

Notice the shape these taxes share. They exempt the closest family and fall hardest on friends, cousins and unmarried partners. If you are leaving money to someone outside your immediate family in one of these states, that is where the planning is worth doing, not on the federal side.

Two more things to watch. The tax usually follows the deceased person's state, not yours, so living elsewhere does not help. And a state inheritance tax is separate from a state estate tax, which several other states levy from thresholds as low as $2 million.

Estate Tax vs Inheritance Tax

The two are constantly confused, including by people writing about them. They are different taxes with different payers.

In practice the federal estate tax reaches almost nobody. Of the estate tax returns filed in 2024, only 2,663 owed any tax at all, against roughly 3.07 million deaths a year. Our guide to the estate tax covers the $15 million exemption, the rate schedule and the filing rule that catches married couples out.

Do You Report an Inheritance?

The inheritance itself does not go on your tax return. There is no line for it, because it is not income. What you may receive and do have to report:

• Schedule K-1 (Form 1041). If the estate earned income while it was being settled, such as interest, dividends or rent, and passed that income to you, the personal representative files a K-1 for you and you report your share. An estate with gross income of $600 or more must file Form 1041.
• 1099s in your own name for anything the assets earn once they are yours.
• A 1099-R for withdrawals from an inherited retirement account.
• Schedule D when you sell an inherited asset, using the stepped-up basis and long-term treatment described above.
• A state inheritance tax return, if the deceased lived in one of the states above. That filing is usually handled through probate rather than your own return.

If you inherited cash and did nothing with it but put it in a savings account, the only thing you report is the interest that account earns after the money arrives.

Sources & Methodology

Every rule here was read from the primary source named, not from a secondary summary.

• IRS Publication 525, Taxable and Nontaxable Income: that gifts, bequests and inheritances are not included in income, that income they later produce is, and that life insurance proceeds paid on a death generally are not taxable.
• IRS Publication 551, Basis of Assets: the date-of-death basis rule for inherited property and the Form 8971 Schedule A reporting.
• IRS Publication 559, Survivors, Executors, and Administrators: the long-term holding period for inherited capital assets, income in respect of a decedent, and the Form 1041 and Schedule K-1 requirements.
• IRS Publication 590-B, Distributions from IRAs: the 10-year rule, the definition of an eligible designated beneficiary, and the treatment of an inherited Roth IRA.
• State rules from the Pennsylvania Department of Revenue, Kentucky Department of Revenue, New Jersey Division of Taxation, Comptroller of Maryland and Iowa Department of Revenue.
• The estate tax figures quoted in the comparison are from the IRS Statistics of Income Estate Tax Returns Study, July 2026, and are set out in full on our estate tax page.

This article is for general education only and is not tax or legal advice. Inheritance is highly individual and interacts with state law, probate and trusts. Consult a qualified tax professional or estate attorney before acting on any of this.

FAQ: Inheritance Tax

Do you pay taxes on an inheritance?
Usually not. There is no federal inheritance tax, and the IRS does not treat an inheritance as taxable income. A few states tax the recipient, and close family is exempt or lightly taxed even there. The common exceptions are inherited traditional retirement accounts and any income the assets earn after you receive them.

How much can you inherit without paying taxes?
At the federal level there is no limit on what you can receive tax free, because the tax falls on the estate rather than on you, and only above $15 million in 2026. The amount you inherit is not what determines your bill; what the assets are determines it.

Is there a federal inheritance tax?
No. The federal government levies an estate tax on the estate before distribution, and it reaches only the largest estates. Taxing the person who receives is something a small number of states do, not the federal government.

Do you have to report an inheritance to the IRS?
The inheritance itself is not reported, because it is not income. You do report income it generates afterwards, any Schedule K-1 the estate issues you, withdrawals from an inherited retirement account, and the sale of an inherited asset on Schedule D.

Do I pay tax when I sell an inherited house?
Only on the gain above its value on the date of death, because your cost basis resets to that value. Sell soon afterwards and the gain is usually small. Whatever gain there is counts as long term regardless of how long you owned it.

Are inherited IRAs taxable?
An inherited traditional IRA or 401(k) is taxable as ordinary income as you withdraw from it, and there is no step-up in basis. Most non-spouse beneficiaries must empty the account within 10 years. An inherited Roth IRA is still subject to the 10-year deadline but qualified distributions are tax free.

Is life insurance taxable to the beneficiary?
Proceeds paid because the insured person died are generally not taxable. Interest the insurer pays on top, for instance if the money is held and paid out in instalments, is taxable, and different rules apply if the policy was transferred to you for a price.

Which states have an inheritance tax?
Pennsylvania, Kentucky, New Jersey and Maryland all do, and we have set out their rules above from each state's own revenue department. Nebraska also levies one through its counties, though we could not reach an official Nebraska source to confirm the current rates. Iowa repealed its inheritance tax for deaths on or after 1 January 2025, so lists that still include Iowa are out of date.

What is the difference between estate tax and inheritance tax?
Estate tax is paid by the estate and depends on how large the estate is. Inheritance tax is paid by each recipient and depends on their relationship to the deceased. The federal government has the first and not the second.

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“Inheritance Tax: Do You Pay Tax on What You Inherit?” Wealthy Pot, 2026. https://wealthypot.com/inheritance-tax/