The federal government does not tax inheritances themselves
There is no federal inheritance tax. When someone dies and leaves you money or property, you do not owe federal income tax on what you receive. This is true whether the estate is worth $10,000 or $10 million.
What does exist is the federal estate tax, which is different. The estate tax is paid by the estate itself — the total collection of everything the person owned — before money gets distributed to heirs. The person who died's executor or administrator pays it from estate assets, not the people who inherit.
Some states also have their own inheritance taxes or estate taxes, which work separately from federal rules. The federal rules are what explore to everyone, regardless of where they live.
Key Takeaways
- The federal government does not tax money or property you receive as an inheritance.
- The federal estate tax applies only to estates worth more than $13.61 million in 2024, and that threshold changes yearly.
- Six states have their own inheritance taxes, and twelve states have their own estate taxes, separate from federal rules.
- If you inherit a retirement account like an IRA or 401(k), you may owe income tax when you withdraw the money, but that is income tax, not inheritance tax.
- The executor or administrator of the estate handles estate tax paperwork, not the heirs.
How the federal estate tax actually works
The federal estate tax applies only when an estate is worth more than a certain amount. In 2024, that threshold is $13.61 million. Estates smaller than that owe no federal estate tax, regardless of how many heirs there are or how the money is split.
This threshold changes every year. It is adjusted for inflation, so the number goes up most years. It was lower in previous years and will likely be higher in future years. You can find the current year's threshold on the IRS website or by asking an estate attorney or tax professional.
When an estate does exceed the threshold, only the amount above it is taxed. The tax rate is 40 percent of the excess. So if an estate is worth $14 million in 2024, only $390,000 is subject to the tax (the $14 million minus the $13.61 million threshold), and the tax owed would be $156,000.
The executor or administrator of the estate files Form 706 (the federal estate tax return) with the IRS if the estate is large enough. Heirs do not file this form or pay this tax directly. They receive their inheritance after the estate tax is paid.
State inheritance and estate taxes
Six states have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. An inheritance tax is paid by the person who receives the money, not by the estate. The tax rate and the amount owed depend on how closely related you are to the person who died and how much you inherited.
Twelve states have estate taxes: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, and Vermont. Maryland has both an inheritance tax and an estate tax. An estate tax works like the federal version — it is paid by the estate before heirs receive their money.
If you live in one of these states or the person who died lived there, you may owe state tax on an inheritance even if you owe no federal tax. The rules vary by state. Some states exempt close relatives like spouses and children. Others tax all heirs the same way. You should check your state's tax agency website or speak with a tax professional if you live in or inherit from someone in one of these states.
Inherited retirement accounts and income tax
Inheriting a retirement account like a traditional IRA, Roth IRA, or 401(k) is different from inheriting cash or property. You do not owe inheritance tax on the account itself, but you may owe income tax when you withdraw money from it.
The rules depend on the type of account and your relationship to the person who died. If you inherit a traditional IRA, withdrawals are taxed as ordinary income. If you inherit a Roth IRA, withdrawals may be tax-free if certain conditions are met. If you inherit a 401(k), the rules are similar to traditional IRAs, though some plans have different payout options.
The IRS requires most non-spouse heirs to withdraw the entire inherited account within ten years of the original owner's death. As you withdraw money, you report it as income on your tax return and pay income tax on it. This is income tax, not inheritance tax, and it is owed by you as the person receiving the distributions.
Spouses who inherit retirement accounts have more options, including the ability to treat the account as their own. You should speak with a tax professional or the financial institution holding the account to understand your specific withdrawal requirements and tax obligations.
What heirs need to do about taxes
If you inherit money or property and the estate is small, you typically do not need to do anything for tax purposes. You do not file a form or report the inheritance on your personal tax return.
If the estate is large enough to require a federal estate tax return, the executor handles that paperwork. You will receive a document showing what you inherited, but you do not file anything with the IRS yourself.
If you inherit a retirement account, the financial institution will send you forms showing the distributions you received. You report those distributions on your tax return as income, just as you would report wages or interest.
If you live in a state with an inheritance tax, you may need to file a state form or report the inheritance to your state tax agency. The rules vary by state. Your state's tax agency website will have instructions, or you can ask the executor or a tax professional.
Frequently Asked Questions
Do I have to report an inheritance on my federal tax return?
No. Inheritances are not reported on your personal federal tax return and do not count as income. The only exception is if you inherit a retirement account and take distributions from it — those distributions are reported as income when you withdraw them.
What if the person who died owed taxes?
The estate pays any taxes owed by the deceased person before distributing money to heirs. This comes out of the estate's assets. You do not inherit the tax debt itself. However, if the estate does not have enough money to pay all debts and taxes, heirs may receive less than expected.
Is there a federal tax on gifts given before someone dies?
The person giving the gift does not owe federal tax on gifts, even large ones. There is a federal gift tax, but it applies only to the giver, and only in rare cases when very large amounts are given. The person receiving a gift never owes federal tax on it.
What happens if I inherit property and later sell it?
When you sell inherited property, you may owe capital gains tax on the profit. However, inherited property receives a "step-up in basis," which means your cost basis is the property's value on the date of death, not what the original owner paid for it. This often means little or no capital gains tax is owed when you sell soon after inheriting.
Can I avoid the estate tax by giving money away before I die?
You can give money away during your lifetime without owing federal gift tax, up to certain limits. However, large gifts may reduce the amount you can pass to heirs tax-free when you die. This is a complex area of tax planning. If you own a large estate, speak with an estate attorney or tax professional about strategies that may work for your situation.