Federal tax on inheritance: what you owe and what you don't
You do not pay federal income tax on money or property you inherit. The person who died pays any tax that is owed — through their estate — before the money reaches you. This is the rule for nearly all inheritances in the United States, and it applies whether you inherit $5,000 or $500,000.
The only time a federal tax bill lands on you as the inheritor is if the money you inherit comes with income attached. If you inherit a rental property and collect rent, you pay tax on that rent. If you inherit a savings account and it earns interest after the person dies, you pay tax on the interest earned after death — not on the original balance. If you inherit a retirement account like an IRA, the withdrawals you make are taxable, though the original deposit was not.
The estate itself — the total value of everything the person left behind — may owe federal estate tax, but only if it exceeds a very high threshold. For 2024, that threshold is $13.61 million. Most estates do not reach that number, so most families never file an estate tax return at all.
Key Takeaways
- You do not pay federal income tax on inherited money, property, or accounts, no matter the amount.
- The estate of the person who died may owe federal estate tax if the total value exceeds $13.61 million in 2024, but this threshold is so high that most families are not affected.
- You do pay income tax on money that the inherited asset earns after you receive it — rent, interest, dividends — but not on the original inheritance itself.
- State inheritance taxes exist in a small number of states and work differently than federal tax; you need to check your state's rules separately.
State inheritance tax: a smaller number of states collect it
Twelve states and the District of Columbia have their own inheritance or estate tax. These are separate from federal tax and have their own rules and thresholds. Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee collect inheritance tax, which is paid by the person who receives the inheritance. Delaware, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington collect estate tax, which is paid by the estate before distribution.
The thresholds and rates vary by state. Some states exempt close relatives like spouses and children entirely. Others set a threshold — for example, New Jersey exempts inheritances under $25,000 — and only tax amounts above that. A few states tax distant relatives or non-relatives at higher rates than they tax children or spouses.
If you live in a state with no inheritance or estate tax, you owe nothing to that state. If you live in a state that has one, or if the person who died lived in a state that has one, you should check that state's department of revenue website or speak with a tax preparer who knows your state's rules.
Inherited retirement accounts and the tax you will owe later
Inheriting a retirement account — an IRA, 401(k), or similar plan — is different from inheriting a regular savings account. You do not pay tax when you inherit it. But you will pay income tax on the money when you withdraw it, and the rules about when you must withdraw it depend on your relationship to the person who died and the type of account.
If you inherit a traditional IRA from a parent, you must begin taking withdrawals within a set timeframe, usually by December 31 of the year following the death. Each withdrawal is taxed as ordinary income. If you inherit a Roth IRA, the withdrawals are tax-free, but you still must take them on a schedule. If you inherit a 401(k), your employer's plan documents control the rules, but most require you to withdraw the full balance within a few years.
The tax bill comes when you withdraw, not when you inherit. A tax preparer or the financial institution holding the account can tell you the withdrawal schedule you must follow and estimate your tax liability based on your income that year.
Inherited property and capital gains tax
When you inherit real estate or other property, you receive what is called a stepped-up basis. This means the value of the property is reset to its fair market value on the date of death. If the person who died bought a house for $200,000 and it was worth $400,000 when they died, your basis is $400,000, not $200,000.
This matters if you sell the property later. If you sell the house for $410,000 a year after inheriting it, you owe capital gains tax only on the $10,000 gain — the difference between the stepped-up basis and your sale price. You do not owe tax on the $200,000 increase that happened before you inherited it. This is a significant tax benefit and applies to most inherited property.
If you rent out the inherited property or hold it for investment, you will owe tax on the income it generates — rent, for example — but again, not on the original inheritance itself.
Inherited money in savings and checking accounts
Money in a bank account is not taxed when you inherit it. If the account earned interest before the person died, that interest was taxed to their estate or on their final tax return. Interest earned after death and before you withdraw it belongs to you and is taxable to you, but the amount is usually small.
Some banks require you to open a new account in your name or provide a death certificate and proof that you are the beneficiary. This is an administrative step, not a tax step. You do not owe tax simply because you moved the money.
Inherited investments and dividends
Stocks, bonds, mutual funds, and other investments you inherit receive the same stepped-up basis as real property. If the person who died owned 100 shares of a stock worth $50 per share when they died, your basis is $5,000. If you sell those shares for $5,100 a month later, you owe capital gains tax on $100, not on any gain that happened before death.
Dividends paid to you after you inherit the investment are taxable income to you in the year you receive them. This is ordinary income tax, not capital gains tax, and you report it on your tax return. Again, you do not owe tax on the dividends that were paid before you inherited the shares.
When you might need to file an estate tax return
The executor or administrator of the estate — the person managing the distribution of assets — may need to file a federal estate tax return even if no tax is owed. The IRS requires an estate tax return (Form 706) if the total value of the estate exceeds the threshold for that year. In 2024, that threshold is $13.61 million for a single person and $27.22 million for a married couple.
If the estate is below the threshold, no federal return is required. Some states require an estate tax return regardless of the federal threshold, so the executor should check state rules as well. The executor handles this, not you — you do not file an estate tax return as the inheritor.
If you are the executor and the estate is large or complex, a tax preparer or estate attorney can help you determine whether a return is required and assist with filing it.
Frequently Asked Questions
Do I have to report inherited money to the IRS?
You do not report the inheritance itself to the IRS on your personal tax return. The executor of the estate handles any required federal filings. You only report income that the inherited asset generates after you receive it — interest, rent, dividends, or withdrawals from retirement accounts.
What if I inherit money from someone who lived in another country?
U.S. citizens and residents pay U.S. federal tax on worldwide income and inheritances. If the person who died was a non-resident alien, different rules may apply. A tax preparer familiar with international tax law can advise you based on the person's citizenship and residency status.
Do I owe tax if I inherit a life insurance payout?
Life insurance proceeds paid to you as the named beneficiary are not taxable income. You do not report them on your tax return. If the insurance policy is part of a large estate that exceeds the federal threshold, the estate itself may owe estate tax, but you as the beneficiary do not owe income tax on the payout.
What if the person who died owed taxes?
The debts of the person who died, including unpaid taxes, are paid from the estate before assets are distributed to heirs. You do not inherit the tax debt. The executor uses estate funds to pay what is owed. If the estate does not have enough money to pay all debts, some heirs may receive less, but you do not personally owe the taxes.
Can I reduce my tax bill by inheriting money through a trust?
Money inherited through a trust is not taxed differently than money inherited directly. You do not pay tax on the inheritance itself. If the trust generates income after the person dies, that income may be taxed to the trust or to you depending on the trust's terms and whether you receive distributions. A trust attorney or tax preparer can explain how your specific trust works.