Do You Pay Taxes on Inheritance? What Beneficiaries Should Know (June 2026)

Inheriting money or property does not create federal income tax. The IRS does not treat an inheritance as taxable income, so you generally do not owe anything simply for receiving it. What does get taxed is income generated by those assets afterward, such as distributions from inherited retirement accounts, gains from selling inherited property, or dividends from inherited investments. At the state level, six states have an inheritance tax, and twelve states plus D.C. have estate taxes.

Key Takeaways:

• Inherited money and property are not taxed as federal income, but income they generate after you receive them is taxed as ordinary income or capital gains.
• Six states levy inheritance tax on beneficiaries, while 12 states plus D.C. charge estate tax before distribution.
• Inherited property receives a stepped-up basis to fair market value at death, so you owe capital gains tax only on appreciation after you inherit it.
• Distributions from inherited traditional IRAs and 401(k)s are taxed as ordinary income, and most non-spouse beneficiaries must withdraw the full balance within ten years.

Do You Owe Federal Income Tax on an Inheritance?

In most cases, an inheritance itself is not subject to federal income tax. The IRS does not treat money or property received as a beneficiary as taxable income, so you generally do not report the inheritance amount on your federal return.

That said, income generated by inherited assets is taxable. A few situations where federal income tax does apply:

• Distributions from inherited traditional IRAs or 401(k)s are taxed as ordinary income, since those accounts were funded with pre-tax dollars.
• Interest, dividends, or rental income earned on inherited assets after the date of death is reportable income.
• Gains from selling inherited property may be taxable, though the stepped-up basis rules often reduce or eliminate the taxable gain.

There is no federal inheritance tax. The federal government has an estate tax, but that is paid by the estate itself before assets are distributed, not by the beneficiary receiving them.

Estate Tax vs Inheritance Tax: What Beneficiaries Need to Know

An estate tax is paid by the estate itself before assets are distributed to beneficiaries. An inheritance tax is paid by the person who receives the assets after distribution. The federal government levies an estate tax but has no inheritance tax. Only six states levy an inheritance tax.

The estate tax is paid by the estate before distribution and has a federal filing threshold of $15 million as of 2026. The inheritance tax is paid by beneficiaries after receiving assets, has no federal version, and rates vary by relationship to the deceased in the six states that charge it.

How Exemptions Work

Most estates owe no federal estate tax because the 2026 federal filing threshold is $15 million.

State estate taxes follow different rules. Several states set their exemptions far lower than the federal threshold, so a family could face state estate tax even when no federal tax is owed.

For inheritance tax, the relationship between the beneficiary and the person who died typically determines the rate and whether any exemption applies. Spouses are exempt in every state that has an inheritance tax. Children and direct descendants are often exempt or taxed at lower rates. More distant relatives and unrelated beneficiaries generally face the highest rates.

What Is the Federal Estate Tax and Who Pays It?

The federal estate tax is a tax on the transfer of wealth from a deceased person's estate to their heirs. It is paid by the estate itself before any assets are distributed to beneficiaries, not by the people who receive the inheritance.

For 2026, the federal filing threshold is $15 million. Estates valued below that threshold owe no federal estate tax at all. For married couples, the exemption can effectively double through a provision called portability, which allows a surviving spouse to use any unused exemption from the deceased spouse's estate.

Estates that do exceed the exemption are taxed only on the amount above the threshold, at rates up to 40%.

How Common Is the Federal Estate Tax?

Because the exemption is so high, the federal estate tax affects a very small share of estates each year. Most families settling an estate will not encounter it.

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Which States Have Inheritance Tax in 2026?

Six states impose an inheritance tax in 2026: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland has both inheritance and estate tax. State-by-state inheritance tax rates and exemptions vary considerably by relationship to the deceased.

States With Estate Taxes: Thresholds and Rates

Twelve states and Washington D.C. have estate taxes, each with its own exemption threshold and rate structure. The table below shows where estate taxes apply and what families can expect to owe.

Capital Gains Tax on Inherited Property When You Sell

When you sell inherited property, capital gains tax applies differently than it does for property you purchased yourself. The IRS assigns inherited property a "stepped-up basis," which resets the cost basis to the fair market value at the date of the original owner's death.

How the Stepped-Up Basis Works

If the property was worth $300,000 when you inherited it and you sell it for $320,000, you owe capital gains tax only on the $20,000 gain, not on the full value. If you hold the property for more than a year before selling, that gain is taxed at long-term capital gains rates, which are 0%, 15%, or 20% depending on your income. If you sell within a year, short-term rates apply, which match your ordinary income tax bracket.

Do Beneficiaries Pay Taxes on Inherited Retirement Accounts?

Inherited retirement accounts follow different rules than most inherited assets. When someone inherits a traditional IRA or 401(k), the funds inside have never been taxed, so withdrawals are treated as ordinary income in the year they are taken. The beneficiary pays income tax on distributions, not a separate inheritance tax.

Since the SECURE Act took effect in 2020, most non-spouse beneficiaries are required to withdraw the full balance within ten years of the original account holder's death. Spouses have more flexibility and can roll the account into their own IRA, spreading distributions over their lifetime.

Roth IRAs are treated differently. Contributions were made with after-tax dollars, so qualified distributions are generally tax-free for beneficiaries.

Key Rules by Account Type

The tax treatment varies depending on what was inherited:

• Traditional IRA or 401(k): withdrawals count as ordinary income, taxed at the beneficiary's marginal rate in each year distributions are taken.
• Roth IRA: qualified distributions are income tax-free, though the account must generally be emptied within ten years for non-spouse beneficiaries.
• Inherited 403(b): plans follow the same general rules as 401(k) accounts for tax purposes.

There is no stepped-up basis for retirement accounts the way there is for inherited property. The full value is subject to income tax as it comes out, which makes the timing of withdrawals worth thinking through carefully with a tax advisor.

Do You Have to Report an Inheritance to the IRS?

Most inheritances do not need to be reported to the IRS. The IRS does not treat inherited money or property as taxable income, so there is no federal inheritance tax form to file simply because you received an inheritance.

There are a few situations where reporting is required, though:

When Reporting May Be Required

• If inherited investments or property are sold, any gain above the stepped-up basis is a taxable capital gain and must be reported on your tax return.
• If an inherited retirement account generates distributions, those distributions are generally treated as ordinary income and reported accordingly.
• If you receive a foreign inheritance above $100,000, you must file IRS Form 3520, even if no tax is owed.
• If an estate generates income before assets are distributed, the estate may issue a Schedule K-1 for beneficiary income reporting.

Receiving an inheritance itself does not trigger a filing requirement. What triggers reporting is earning income from inherited assets after you receive them.

How to Report the Sale of Inherited Property on Your Tax Return

When inherited property is sold, the gain or loss is reported on Schedule D of Form 1040, along with Form 8949.

The figures that matter are the sale price and the stepped-up basis. The difference between the two is the taxable gain. Because inherited property receives a stepped-up basis to fair market value at the date of death, most beneficiaries owe little or nothing if the property is sold shortly after inheriting it.

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What Happens When You Inherit Life Insurance, Annuities, or Trust Distributions

Life Insurance

Life insurance death benefits paid to a named beneficiary are generally income-tax-free. The IRS does not treat a death benefit as taxable income, though interest earned on a delayed payout can be taxable.

Annuities

Inherited annuities are treated differently. A beneficiary typically owes income tax on the earnings portion of any distributions, not the original principal.

Trust Distributions

Whether trust distributions are taxable depends on the type of trust and what is being distributed. Distributions of principal from an irrevocable trust are generally not taxable income, while distributions of income earned by the trust are.

How Elayne Helps Families Manage Inheritance and Estate Settlement

Inheritance and estate settlement involve managing paperwork, coordination, and difficult decisions. Elayne helps families move through these processes with a clear picture of what needs to happen and a structured path for getting there.

Elayne organizes the steps involved in settling an estate, from identifying accounts and assets to tracking filing requirements and notifying the right institutions. For families sorting through inheritance tax questions, estate distributions, or the sale of inherited property, having a structured overview of obligations can make the process feel more manageable.

FAQs

Do I have to pay federal taxes on inheritance?

No, in most cases. The IRS does not treat money or property you inherit as taxable income, and there is no federal inheritance tax. However, income generated by inherited assets (such as distributions from inherited traditional IRAs or 401(k)s, interest, dividends, or gains from selling inherited property) is taxable.

Estate tax vs inheritance tax: what's the difference?

An estate tax is paid by the estate itself before assets are distributed to beneficiaries, while an inheritance tax is paid by the person receiving the assets after distribution. The federal government has an estate tax, but no inheritance tax, and only six states levy an inheritance tax.

What states have inheritance tax in 2026?

Six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Spouses are exempt in every state, and children or direct descendants often receive reduced rates or full exemptions, while more distant relatives and unrelated beneficiaries typically face the highest rates.

How is inherited property taxed when sold?

You owe capital gains tax only on the gain above the stepped-up basis, which resets to the property's fair market value at the date of death. If you inherited property worth $300,000 and sell it for $320,000, you're taxed on the $20,000 gain, not the full value, and holding it for more than a year qualifies it for long-term capital gains rates.

Do beneficiaries pay taxes on inherited retirement accounts?

Yes. Distributions from inherited traditional IRAs or 401(k)s are taxed as ordinary income because the funds were never taxed before, and most non-spouse beneficiaries must withdraw the full balance within ten years. Roth IRAs are different: qualified distributions are generally tax-free for beneficiaries, though the ten-year rule still applies.

*Disclaimer: This article is for informational purposes only and does not provide legal, medical, financial, or tax advice. Please consult with a licensed professional to address your specific situation.