Inheritance tax: do you pay taxes on an inheritance?
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Dana's aunt left her $60,000 and a brokerage account, and for two weeks Dana didn't touch any of it. She'd heard somewhere that inheritances get taxed at 40 percent, and she was afraid of spending money she'd end up owing to the government. Then a friend who did taxes for a living asked her one question: "Where did your aunt live?" The answer turned out to matter more than the amount.
If you've just inherited something, the inheritance tax question is probably one of the first that comes up, usually around 2 a.m. The short answer is that most people in the U.S. owe nothing on an inheritance itself. The longer answer depends on three things: which state the person lived in, your relationship to them, and what kind of asset you received. This guide walks through each one in plain English, so you can tell whether you need to set money aside or can let yourself breathe.
Do you pay taxes on an inheritance?
For most heirs, no. The IRS says plainly in its guidance on gifts and inheritances that property you inherit isn't counted as income on your federal return. There's also no federal inheritance tax today.
What people tend to be thinking of is the federal estate tax, which is a different thing and rarely applies. The estate tax is charged to the estate itself, before anything reaches the heirs, and only if the total is very large. For deaths in 2026, the exemption is $15 million per person, and married couples can effectively combine theirs. In practice, only a small fraction of one percent of estates owe it.
So for a typical family, the money in a checking account, a paid-off house, or a car comes to you without a federal tax bill attached. The exceptions are real, though, and some of them are easy to miss. They fall into two groups: state inheritance taxes, and income tax on certain kinds of assets.
Estate tax vs inheritance tax: who pays which
The simplest way to keep them apart is to ask who writes the check. With estate tax, the executor pays it out of the estate, and heirs receive whatever is left. With inheritance tax, each beneficiary owes tax on their own share, and the rate often changes depending on whether they were a spouse, a child, a niece, or a neighbor.
The federal government only has an estate tax. States can have either, both, or neither. About a dozen states and Washington, D.C. have their own estate tax, usually with a much lower threshold than the federal one (Massachusetts starts at $2 million, and Oregon at $1 million). Maryland is the only state with both an estate tax and an inheritance tax.
If the estate does owe estate tax, the executor handles it as part of settling the estate, along with the person's final income tax return. Our guide to filing taxes for a deceased person covers that side, including the estate's own return on Form 1041.
Which states have an inheritance tax in 2026?
Five states have an inheritance tax in 2026: Pennsylvania, New Jersey, Kentucky, Nebraska, and Maryland. Iowa used to be on the list, but it phased its tax out completely for deaths on or after January 1, 2025.
The rule that surprises people is that your own address doesn't matter. The tax follows where the person who died lived, plus wherever they owned real estate. If your mother lived in Philadelphia and you live in Texas, Pennsylvania's tax applies to your share. If she lived in Texas but owned a cabin in Pennsylvania, the cabin may be taxed there.
Every one of these states exempts a surviving spouse. Beyond that, the rules vary a lot by relationship:
- Pennsylvania taxes the most people. Children and grandchildren pay 4.5 percent, siblings pay 12 percent, and nearly everyone else pays 15 percent. A spouse pays nothing, and so does a parent inheriting from a child 21 or younger. Paying within three months of the death earns a 5 percent discount, and the tax is due within nine months.
- New Jersey exempts children, grandchildren, parents, and stepchildren. Siblings and sons- or daughters-in-law get the first $25,000 tax-free and then pay 11 to 16 percent. Other beneficiaries, like nieces, nephews, and friends, pay 15 to 16 percent from the first dollar.
- Kentucky exempts parents, children, grandchildren, and siblings. Nieces, nephews, aunts, uncles, and in-laws pay roughly 4 to 16 percent, and more distant beneficiaries pay 6 to 16 percent, each after a small exemption.
- Nebraska taxes even close relatives, but lightly. Children, grandchildren, parents, and siblings pay 1 percent on anything over $100,000. More distant relatives pay 11 percent above $40,000, and everyone else pays 15 percent above $25,000. The tax is collected at the county level.
- Maryland charges a flat 10 percent, mostly on beneficiaries outside the immediate family. Spouses, children, grandchildren, parents, grandparents, stepchildren, and siblings are all exempt.
Life insurance paid to a named beneficiary is generally exempt from all five states' inheritance taxes, and so are gifts to charity. Retirement accounts are a mixed picture. Pennsylvania, for example, may tax them depending on the person's age and whether they could have withdrawn the money freely.
These numbers change, and each state has its own exceptions for things like family farms and small businesses. Before anyone pays, check with the state's revenue department. The Pennsylvania Department of Revenue's inheritance tax page is a good example of what to look for: rates by relationship, deadlines, and the forms the executor files. A local estate attorney or CPA can confirm how the rules apply to your situation.
When an inheritance does create income tax
Even when no inheritance tax applies, a few kinds of assets carry income tax with them. This is where most families actually end up owing something, and it's usually because of a retirement account.
Inherited retirement accounts
Money in a traditional IRA or 401(k) was never taxed going in, so the tax comes due when someone takes it out. If you inherit one, each withdrawal counts as ordinary income in the year you take it. Most adult children and other non-spouse beneficiaries must empty the account within 10 years, and depending on when the original owner started their required distributions, you may need to take some out every year along the way.
Inherited Roth accounts are usually tax-free to withdraw, though the 10-year rule still applies to most beneficiaries. Our guide to inherited IRA rules explains the timelines and how spouses are treated differently.
Selling inherited property
Houses, stocks, and other investments usually get what's called a stepped-up basis. Their value for tax purposes resets to what they were worth on the date of death, which wipes out decades of gains the original owner never paid tax on.
Here's how that plays out. Say your father bought stock for $20,000 in 1995, and it was worth $150,000 when he died. If you sell it a few months later for $152,000, you owe capital gains tax on $2,000, not $132,000. The same logic applies to a family home, which is one reason many heirs sell relatively soon. Our post on what to do with an inherited house goes through that decision in more detail, including property tax and what happens with siblings.
Income that was owed to the person
Some money was already on its way to the person when they died: a final paycheck, an unpaid bonus, accrued interest on savings bonds, or annuity payments. The IRS calls this "income in respect of a decedent," and whoever receives it pays income tax on it, just as the person would have. IRS Publication 559 is the official reference if you want the details.
Anything an inheritance earns after you receive it is also yours to report. If $60,000 sits in a savings account earning 4 percent, the interest goes on your return like any other interest.
What to do in the first few months
Most of the tax work after a death belongs to the executor, not to individual heirs. If you're a beneficiary, the useful thing is to ask the executor a few questions early. Which state did the person live in? Did they own real estate anywhere else? Will the estate pay any inheritance tax before distributing, or will each heir handle their own share? In Pennsylvania, executors often pay the tax out of the estate, while in other states it can work differently.
If you're the executor, start a simple spreadsheet listing each asset, its value on the date of death, and who it goes to. That date-of-death value is what you'll need for any state inheritance tax return, and it's also the number each heir will need later to calculate capital gains. Getting appraisals or brokerage statements for that date now is far easier than reconstructing them three years from now when someone sells. Our executor duties checklist shows where this fits among everything else.
It's also worth holding off on a few moves until you understand the tax picture. Cashing out an entire inherited IRA in one year, for example, can push you into a much higher bracket. Spreading withdrawals over several years often costs less. A tax professional can run those numbers in an hour or two, and that hour tends to pay for itself.
A note for anyone planning ahead
If you're reading this because you're thinking about what you'll leave behind rather than what you've received, the most helpful thing you can do is make the tax side easy to understand. Your heirs won't need you to be an expert. They'll need to know what you own, where the statements are, which accounts have named beneficiaries, and whether you own property in another state. A one-page note covering those things can save weeks of confusion.
You might also say something in your own words about what you hope the money does. Families often freeze up over an inheritance for reasons that have nothing to do with taxes. People feel guilty spending it, or end up arguing about what the person would have wanted. Dana, in the end, owed nothing on her aunt's money, since her aunt lived in Ohio, and paid a modest capital gains bill on the brokerage account. What she said she wished she'd had was a single line from her aunt telling her to go ahead and use it.
If you'd like to leave that kind of note alongside the practical details, When I Die Files lets you keep your account list and property records next to a few personal words, so the people settling things have the facts and know what you hoped they'd do with them.