Receiving an inheritance can feel overwhelming, especially when tax questions arise.
Do I have to pay taxes on inheritance? The good news is that most inherited money isn’t taxed right away. But there are important exceptions you need to know about.
I’ve helped many families work through this exact situation.
In this guide, I’ll explain federal estate taxes, state inheritance rules, and how different assets get taxed.
Let’s clear up the confusion together.
How Inheritance Taxes Work
Most people don’t realize that inheritance itself usually comes to you tax-free. The person who passed away already paid taxes on that money during their lifetime.
However, certain situations can trigger tax bills. If the estate is extremely large, federal estate taxes might apply before you receive anything. Some states also charge their own inheritance or estate taxes based on where the deceased lived.
The confusion often comes from what happens after you inherit. When you sell inherited property or withdraw money from inherited retirement accounts, that’s when taxes can show up.
Understanding Inheritance Taxes
Federal law doesn’t impose inheritance taxes, but six states do, with rates varying based on your relationship to the deceased.
What Are Inheritance Taxes?
An inheritance tax is a fee charged by some states when you receive property or money from someone who died. You, the beneficiary, are responsible for paying this tax.
This differs from an estate tax. Estate taxes get paid by the deceased person’s estate before assets are distributed. Inheritance taxes come out of your pocket after you receive your share.
The amount you pay often depends on your relationship to the deceased. Spouses typically pay nothing. Close relatives like children might get reduced rates. Distant relatives or friends usually face the highest rates.
Federal vs State Taxes
The federal government doesn’t charge inheritance taxes at all. You won’t see the IRS asking for a cut when you inherit from a parent, grandparent, or friend.
Federal estate taxes do exist, though. In 2025, estates worth more than $13.99 million are subject to federal estate tax. The tax rate ranges from 18% to 40%, depending on the estate’s value. Most families never hit this threshold.
State-level rules vary widely.
Six states currently impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Twelve states have their own estate taxes with lower exemption amounts than the federal level.
Federal Taxes on Inheritance
While there’s no federal inheritance tax, you may face estate taxes on large inheritances or capital gains when selling inherited assets.
Estate Tax
The federal estate tax applies to the total value of someone’s estate before distribution. If the estate exceeds $13.99 million in 2025, the excess amount gets taxed.
Tax rates start at 18% for amounts just over the exemption and climb to 40% for the largest estates. The executor of the estate handles this payment before beneficiaries receive anything.
Here’s an example: An estate worth $15 million would have $1.01 million subject to tax (the amount over $13.99 million). The tax bill could range from roughly $180,000 to $404,000 depending on calculations.
Capital Gains Tax
Capital gains tax becomes relevant when you sell inherited property for more than its value at the time of inheritance. This applies to stocks, real estate, collectibles, and other investments.
The stepped-up cost basis rule helps you here. Your “basis” (the starting value for calculating gains) gets reset to the asset’s fair market value on the date of death. You only pay tax on gains above that stepped-up value.
Say your parents bought stock for $10,000 that’s worth $100,000 when they die. You inherit it with a $100,000 basis. If you sell it for $105,000, you only owe capital gains tax on the $5,000 gain, not the full $95,000 appreciation.
Income Tax Considerations
Retirement accounts need special attention. Traditional 401(k)s and IRAs contain pre-tax money. When you withdraw from inherited pre-tax accounts, you’ll owe ordinary income tax on those distributions.
The rules changed recently. Most non-spouse beneficiaries must empty inherited retirement accounts within 10 years. Each withdrawal adds to your taxable income for that year.
Roth accounts work differently. Since the original owner already paid taxes, your withdrawals come out tax-free. You still face the 10-year distribution requirement, but at least you won’t owe income tax.
State Taxes on Inheritance
Six states charge inheritance taxes while twelve impose estate taxes, each with different exemption levels and rates based on location and family relationships.
States with Inheritance Tax
Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania currently charge inheritance taxes. Iowa is phasing out its inheritance tax completely in 2025.
The tax rate depends on your relationship to the deceased. In Pennsylvania, direct descendants pay 4.5%, siblings pay 12%, and other heirs pay 15%.
New Jersey exempts children, grandchildren, and parents entirely. Kentucky charges rates from 4% to 16% based on the inheritance amount and relationship.
States with Estate Tax
Twelve states impose their own estate taxes: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
These state exemptions are much lower than the federal $13.99 million threshold. Oregon’s exemption is just $1 million.
Massachusetts and Oregon have the lowest at $2 million. Other states range from $3 million to $13.61 million.
Common Inherited Assets and Tax Implications
Different asset types have varying tax treatments, from tax-free cash and life insurance to retirement accounts requiring income tax on distributions.
Cash and Stocks
Inheriting cash is straightforward. You don’t owe any tax when you receive it. The money is yours to use however you want.
Stocks and other securities also transfer to you tax-free initially. You get the stepped-up basis benefit, meaning your cost basis resets to the stock’s value on the date of death.
Taxes only come into play when you sell.
Retirement Accounts
Pre-tax retirement accounts like traditional 401(k)s and IRAs create a tax obligation when you take distributions. Every dollar you withdraw counts as ordinary income on your tax return.
Spouses can often roll inherited accounts into their own IRAs. Non-spouse beneficiaries typically must withdraw all funds within 10 years of the account owner’s death.
Real Estate
Inherited real estate gets a stepped-up basis just like stocks. The property’s value on the date of death becomes your cost basis for tax purposes.
If you sell the property soon after inheriting, you probably won’t owe much in capital gains tax. Any appreciation from the date of death to the sale date would be taxable.
Holding the property and renting it out means you’ll owe income tax on rental profits.
Art, Collectibles, and Life Insurance
Collectibles like art, antiques, coins, and precious metals face a higher capital gains rate of 28% when sold. You still get the stepped-up basis benefit.
Life insurance proceeds generally come to you completely tax-free. The death benefit isn’t considered taxable income.
However, if the policy was held in the deceased’s estate and the estate exceeds exemption limits, estate tax might apply before you receive the payout.
Strategies to Minimize Taxes on Inheritance
Smart planning with trusts, annual gifts, and strategic account management can significantly reduce or eliminate taxes on inherited wealth.
Trusts
Trusts are powerful tools for reducing estate and inheritance taxes. Irrevocable trusts remove assets from your taxable estate.
Once you transfer property into an irrevocable trust, it no longer counts toward estate tax calculations.
Trusts also provide privacy. Unlike wills that go through public probate, trust distributions happen privately without court involvement or public records.
Gifting Strategies
You can give away up to $19,000 per person per year in 2025 without filing a gift tax return. This annual exclusion lets you reduce your estate size while helping family members.
Married couples can combine their exclusions to give $38,000 per recipient annually. Over time, this can move significant wealth out of your taxable estate.
Direct payments for someone’s medical expenses or tuition don’t count against the annual exclusion. You can pay these costs directly to providers without using up your gift allowance.
Managing Pre-Tax Distributions
If you inherit a traditional IRA or 401(k), consider spreading withdrawals over the allowed timeframe. Taking the minimum required each year keeps you in lower tax brackets.
Some beneficiaries choose to convert inherited traditional IRA funds to a Roth IRA. You’ll pay income tax on the conversion amount, but future growth and withdrawals become tax-free.
When to Seek Professional Guidance
- You should consult professionals when dealing with estates larger than federal or state exemption amounts. The potential tax savings far outweigh advisory fees.
- Get help if you’re inheriting retirement accounts with complex distribution rules. A CPA can model different withdrawal strategies to minimize lifetime taxes.
- Estate attorneys prove valuable when setting up trusts, handling probate, or dealing with contested wills.
- Financial advisors help you manage inherited investments and plan for long-term wealth preservation.
Conclusion
Inheriting money or property doesn’t usually trigger immediate taxes, but understanding the rules helps you avoid surprises down the road.
I’ve seen too many people lose thousands because they didn’t know about stepped-up basis or state inheritance taxes.
The key is planning ahead. Talk to a CPA or estate attorney before making any big moves with your inheritance. These conversations saved me serious headaches when I inherited my grandmother’s property.
Take time to review your situation and make informed decisions that protect your financial future.
Have questions about your specific situation? Drop a comment below. I’d love to hear about your experience with inheritance taxes.
Frequently Asked Questions
Do I have to pay federal taxes when I inherit money?
No, there’s no federal inheritance tax. However, if the estate exceeds $13.99 million, federal estate tax may apply, and you might owe capital gains tax when selling inherited assets.
Which states charge inheritance taxes?
Six states currently charge inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Tax rates and exemptions vary based on your relationship to the deceased.
What is a stepped-up cost basis and how does it help me?
A stepped-up basis resets the value of inherited assets to their fair market value on the date of death. You only pay capital gains tax on appreciation after inheritance, not the original owner’s lifetime gains.
Do I owe taxes on inherited retirement accounts?
Yes, traditional IRAs and 401(k)s require ordinary income tax on withdrawals, while Roth accounts offer tax-free withdrawals. Most non-spouse beneficiaries must empty inherited retirement accounts within 10 years.
How can I reduce taxes on a large inheritance?
Use trusts to move assets out of your taxable estate, make annual gifts up to $19,000 per person, and convert inherited IRAs to Roth accounts strategically. Work with estate planning professionals for state-specific strategies.
