The federal government does not tax inheritance itself, but it does tax the estate before money passes to heirs

There is no federal inheritance tax on money or property you receive. When someone dies and leaves you money, you do not owe federal tax on that amount. However, the person who died may have owed a tax on their total estate before anything was distributed — and that tax comes out of what heirs receive.

The distinction matters because it changes who pays and when. An estate tax is paid by the estate itself (the sum of everything the person owned) before distribution. An inheritance tax would be paid by the person receiving the money. The federal system uses estate tax, not inheritance tax. Some states use inheritance tax instead, which is a separate matter.

Key Takeaways

  • The federal government taxes estates, not inheritances — the tax is paid from the estate before heirs receive their share, not by the heirs themselves.
  • Federal estate tax only applies to estates larger than $13.61 million (2024), so most people never encounter it.
  • The threshold amount changes yearly and is scheduled to drop to roughly $7 million per person in 2026 unless Congress acts.
  • Some states impose their own inheritance tax or estate tax on top of federal rules, so check your state's rules separately.
  • Money you inherit is not counted as income on your federal tax return, even if the estate was large.

How the federal estate tax works

The federal estate tax applies only to estates above a certain size. For 2024, that threshold is $13.61 million per person. If someone dies with a total estate worth less than that, no federal estate tax is owed, and heirs receive everything (minus any debts the estate must pay).

If the estate exceeds the threshold, the executor or administrator of the estate files a federal estate tax return (Form 706) and pays tax on the amount above the limit. The tax rate is 40 percent on the excess. For example, an estate worth $15 million would owe 40 percent tax on $1.39 million (the amount over $13.61 million), which equals roughly $556,000. That amount comes out of the estate before heirs are paid.

The threshold is not permanent. It is scheduled to drop to approximately $7 million per person on January 1, 2026, unless Congress passes new legislation. This change affects planning for people with large estates, but most households will never reach either threshold.

The difference between federal and state inheritance taxes

Six states currently impose an inheritance tax: 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 amount owed depend on the state, the size of the inheritance, and the relationship between the deceased and the heir (spouses and children often pay less or nothing).

Some states also have their own estate tax, separate from the federal one. These states include Connecticut, Delaware, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. A state estate tax works like the federal version — it taxes the estate itself before distribution — but the threshold is usually much lower than the federal limit.

If you inherit money and live in a state with an inheritance tax or estate tax, you may owe state tax even if no federal tax is due. Check your state's revenue or tax department website for current rates and thresholds.

What inherited money counts as on your taxes

Inherited money and property are not considered income for federal tax purposes. You do not report the inheritance on your federal income tax return (Form 1040), and you do not owe federal income tax on it.

However, if the inherited property generates income after you receive it, that income is taxable. For example, if you inherit a rental house, the rent you collect is taxable income. If you inherit stocks and receive dividends, those dividends are taxable. If you inherit a savings account and earn interest on it, that interest is taxable. The inheritance itself is not taxed, but what it produces is.

When an estate must file a federal tax return

The executor or administrator of an estate must file Form 706 (the federal estate tax return) only if the estate's total value exceeds the threshold for that year. For 2024, that means filing is required only if the estate is worth more than $13.61 million.

Even if filing is not required, an executor may choose to file anyway in some situations — for example, to establish a lower tax basis for inherited property, which can reduce taxes when heirs later sell it. This is a technical decision that usually involves a tax professional or attorney.

How to learn about an estate owes federal tax

If you are an executor or administrator, add up the fair market value of everything the person owned at the time of death: real estate, bank accounts, investments, vehicles, life insurance proceeds, retirement accounts, and personal property. Subtract any debts the estate must pay (mortgages, loans, funeral costs). If the remaining amount is below the threshold for the year of death, no federal estate tax is owed.

If the total is close to or above the threshold, consult a tax professional or estate attorney. They can review the details, determine whether filing is required, and handle the return if it is. Many states require an estate to be probated through the court system, and the probate process often involves an attorney anyway.

Frequently Asked Questions

Do I have to pay tax on money I inherit?

No federal income tax is owed on inherited money. However, if the estate was large enough to owe federal estate tax, that tax is paid by the estate before you receive your share. Additionally, some states impose inheritance tax or estate tax on their own. Check your state's rules.

What if I inherit a house or car — do I owe tax on that?

You do not owe federal income tax on the inherited property itself. However, if you later sell it, you may owe capital gains tax on the profit. The tax basis of inherited property is usually "stepped up" to its fair market value at the time of death, which often reduces or eliminates capital gains tax when you sell.

Will the federal estate tax threshold change?

Yes. The current threshold of $13.61 million per person is scheduled to drop to roughly $7 million on January 1, 2026, unless Congress passes new legislation. This change affects planning for people with large estates, but most households will not be affected.

What if the person who died had a will or trust?

A will or trust does not change whether federal estate tax is owed — the tax depends only on the total value of the estate, not on how it is distributed. However, a trust or will can affect how the estate is divided and may include strategies to reduce estate tax. An attorney can explain the options.

Do I need to report inherited money to the IRS?

You do not report the inheritance itself on your tax return. However, if you inherit a retirement account (like an IRA) or other income-producing asset, you may have reporting requirements. Consult a tax professional about your specific situation.