Federal inheritance tax does not exist, but your state may have one
The United States has no federal tax on money or property you receive from someone's estate. That is a common misconception. What does exist is a federal estate tax — a tax on the total value of everything the deceased person owned — but it only applies to estates worth more than $13.61 million (as of 2024; this threshold changes yearly). Unless you are inheriting from a very wealthy person, you will not owe federal tax on what you receive.
Twelve states and the District of Columbia do impose their own inheritance or estate taxes. These are separate from federal tax and have much lower thresholds. The rules, rates, and exemptions vary significantly by state. If you live in or are inheriting property in one of these states, you may owe state tax on your inheritance.
The states with inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee. The states with estate tax are Connecticut, Delaware, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Some states have both. The District of Columbia has an estate tax.
Key Takeaways
- Federal inheritance tax does not exist; only a federal estate tax applies to estates over $13.61 million, which almost no individual inheritor will owe.
- Twelve states and D.C. have their own inheritance or estate taxes with thresholds as low as $40,000, depending on the state and your relationship to the deceased.
- Your relationship to the deceased (spouse, child, sibling, unrelated) determines whether you owe tax in states that have inheritance tax.
- The executor or administrator of the estate typically handles tax filing and payment, not the person receiving the inheritance.
- Most people who inherit do not owe any tax because either they live in a state without inheritance tax, or the estate is below that state's threshold.
How state inheritance tax works
In states with inheritance tax, the tax is owed by the person who receives the money or property, not by the estate itself. The rate and whether you owe anything at all depend on two things: your relationship to the person who died, and the value of what you received.
Spouses are almost always exempt from inheritance tax. Children are usually exempt or taxed at a lower rate than more distant relatives. Siblings, grandchildren, and unrelated people face higher rates or lower exemption thresholds. For example, in Pennsylvania, spouses and children pay no inheritance tax, but siblings pay 12 percent and unrelated people pay 15 percent on amounts over $3,500.
The executor of the estate — the person named in the will or appointed by the court to settle the estate — is responsible for filing inheritance tax returns and paying the tax. You as the inheritor do not file the tax return yourself, though you may receive a statement showing what tax was paid on your behalf.
State estate tax versus state inheritance tax
These two taxes work differently and apply in different states. Inheritance tax is paid by the person receiving the money. Estate tax is paid by the estate itself before money is distributed to heirs. From your perspective as an inheritor, the practical difference is small: either way, tax reduces the amount you receive, and the executor handles the filing.
Estate tax thresholds are generally higher than inheritance tax thresholds. Connecticut's estate tax, for example, applies to estates over $12.92 million. New York's applies to estates over $6.94 million. These are still high enough that most estates do not owe. Inheritance tax thresholds are lower — Maryland's is $40,000 for unrelated people, for instance — but the relationship exemptions mean many heirs pay nothing.
A few states have both taxes. In those cases, the estate may owe estate tax, and individual heirs may also owe inheritance tax on what they receive. The executor navigates both.
What counts as taxable inheritance
Not everything you inherit is subject to tax. Life insurance proceeds paid directly to a named beneficiary are usually exempt. Money in a retirement account (IRA, 401k) that passes to a named beneficiary is typically not subject to inheritance or estate tax, though you may owe income tax when you withdraw it later. Property held in a trust may be handled differently depending on the trust terms and state law.
Real estate, bank accounts, investments, and personal property (cars, jewelry, art) are generally taxable if they pass through the estate. The value used for tax purposes is usually the fair market value on the date of death, not what the deceased person originally paid for it.
Debts owed by the estate — funeral costs, medical bills, mortgages, credit card debt — are paid from the estate before inheritance tax is calculated. This can significantly reduce the taxable amount.
Thresholds and rates by state
| State | Tax Type | Threshold (varies by relationship) | Rate Range |
|---|---|---|---|
| Iowa | Inheritance | $25,000 (spouse exempt) | 1–16% |
| Kentucky | Inheritance | $1,000 (spouse, children exempt) | 4–16% |
| Maryland | Inheritance | $40,000 (spouse, children exempt) | 10% |
| Nebraska | Inheritance | $40,000 (spouse, children exempt) | 1–18% |
| New Jersey | Inheritance | $25,000 (spouse, children exempt) | 11–16% |
| Pennsylvania | Inheritance | $3,500 (spouse, children exempt) | 4.5–15% |
| Tennessee | Inheritance | $1,000 (spouse, children exempt) | 5.5–16% |
| Connecticut | Estate | $12.92 million | 3.6–12% |
| New York | Estate | $6.94 million | 3.06–16% |
These thresholds and rates change annually and vary by the relationship between the deceased and the heir. The table shows general ranges; check your state's tax department website for current figures if you are inheriting in one of these states.
When you might owe federal tax on an inheritance
You will not owe federal income tax on an inheritance itself. Money you receive from an estate is not considered income. However, you may owe federal income tax on earnings that come from the inherited property after you receive it — for example, interest on a bank account, dividends from stocks, or rent from rental property.
The only time federal estate tax applies is if the total estate is worth more than $13.61 million (2024). If it is, the executor pays the tax from the estate before distributing money to heirs. This threshold is high enough that fewer than 1 in 1,000 estates owe federal tax in any given year.
If you inherit a retirement account like an IRA or 401k, you will owe federal income tax when you withdraw money from it, but not on the inheritance itself. The rules for how long you can stretch withdrawals changed in 2023, so if you inherited a retirement account recently, ask the account custodian or a tax professional about your withdrawal timeline.
What to do if you are inheriting
If you are expecting to inherit, find out which state the estate will be settled in. That determines whether inheritance or estate tax applies. The executor or the attorney handling the estate should tell you this. If you are in a state with inheritance tax and you are not a spouse or child, ask the executor what your relationship category is for tax purposes — it affects your rate.
You do not need to do anything yourself. The executor files the necessary tax returns and pays any tax owed before distributing your share. You will receive a statement or Form 1099 showing what you inherited and what tax was paid, if any. Keep this for your records.
If the estate is large or complex, the executor may hire an estate attorney or tax professional. This is normal and the cost comes from the estate, not from your inheritance.
Frequently Asked Questions
Do I have to pay tax on money I inherit from my parents?
No federal tax applies. If your parents lived in or owned property in one of the twelve states with inheritance tax, the estate may owe state tax, but spouses and children are almost always exempt from state inheritance tax. You will not owe anything.
What if I inherit a house?
The house itself is not subject to federal income tax. If the estate is in a state with inheritance or estate tax and you are not exempt (usually only spouses and children are), the tax is calculated based on the house's fair market value on the date of death. The executor pays this from the estate. You will not owe federal income tax on the house, but you may owe property tax going forward, and if you sell it later, you may owe capital gains tax on any increase in value after you inherited it.
Can I reduce the tax I owe on an inheritance?
The executor may be able to reduce the taxable estate by paying debts, funeral costs, and charitable donations from the estate before calculating tax. If the estate is very large, an estate attorney can discuss strategies like trusts. These decisions are made by the executor and the estate's legal team, not by individual heirs.
What if the person who died lived in a different state than I do?
The state where the deceased person lived and owned property determines which state taxes apply. If they lived in a state with inheritance tax, that state's rules apply to their estate, even if you live elsewhere. If they owned real estate in multiple states, those states may also claim tax on that property.
Do I owe tax if I inherit through a will versus a trust?
The tax rules are the same regardless of whether the inheritance comes through a will or a trust. The main difference is that a trust may avoid probate court, which can speed up the process, but it does not change whether inheritance or estate tax applies.