Inheritance Tax: Do You Owe Federal or State Taxes?

Receiving an inheritance raises an immediate question: do you owe taxes on it? The short answer for most Americans is no — there is no federal inheritance tax, and the federal estate tax exemption is high enough that approximately 99.9% of estates are not affected. However, six states impose their own inheritance taxes, and the distinction between estate taxes and inheritance taxes trips up many families.

Data Notice: Estate and inheritance tax exemptions and rates cited here are projected 2026 figures. The federal estate tax exemption is inflation-adjusted annually and faces a scheduled reduction after 2025 under prior law, potentially modified by recent legislation. Verify with IRS.gov. Specific to Explained tax provisions discussed in this article.

This guide explains exactly who owes what, the difference between estate and inheritance taxes, the stepped-up basis benefit, and what the OBBB’s permanent ~$15 million exemption means for your family.

Federal Estate Tax vs. State Inheritance Tax

These are two different taxes that apply to two different people at two different levels of government.

Feature	Federal Estate Tax	State Inheritance Tax
Who pays	The estate (before distribution)	The heir (after receiving assets)
Imposed by	Federal government	6 state governments
Based on	Total estate value	Amount each individual heir receives
Exemption	~$15,000,000 per individual (2026)	Varies by state and relationship to deceased
Top rate	40%	15%–18% depending on state

The Key Distinction

The estate tax is paid by the deceased person’s estate before assets are distributed. The inheritance tax is paid by the person receiving the assets after distribution. In practice, both reduce the total amount that heirs receive.

Federal Estate Tax: The ~$15 Million Exemption

The One Big Beautiful Bill made the TCJA’s doubled estate tax exemption permanent and indexed it for inflation. For 2026, the exemption is projected at approximately ~$15 million per individual.

2026 Federal Estate Tax Numbers

Feature	Amount
Individual exemption	~$15,000,000
Married couple (with portability)	~$30,000,000
Top rate	40%
Annual gift tax exclusion	~$19,000 per recipient
Lifetime gift tax exemption	Unified with estate exemption

For a detailed breakdown of planning strategies, see our estate tax exemption permanent guide.

What This Means for Most Families

With a ~$15 million exemption, a married couple can pass up to ~$30 million to their heirs with zero federal estate tax. The IRS estimates that fewer than 4,000 estates per year owe federal estate tax — less than 0.1% of annual deaths.

Portability: Using a Deceased Spouse’s Exemption

If the first spouse to die has an estate below ~$15 million, the unused exemption can transfer to the surviving spouse. This “portability” election requires filing Form 706 (Estate Tax Return) within 9 months of death, even if no estate tax is owed.

Example: Husband dies in 2026 with a $5 million estate. His unused exemption of ~$10 million transfers to his wife. She now has a combined exemption of ~~$25 million (~~$15 million of her own + ~$10 million ported from her husband).

State Inheritance Taxes: The 6 States

Six states impose inheritance taxes on the people who receive assets from an estate. The tax rate depends on the heir’s relationship to the deceased.

States with Inheritance Taxes (2026)

State	Spouse Rate	Children/Grandchildren	Siblings	Others
Iowa	Exempt	Exempt (phasing out fully)	Phasing out	Phasing out
Kentucky	Exempt	Exempt	4%–16%	6%–16%
Maryland	Exempt	Exempt	10%	10%
Nebraska	Exempt	1% (over ~$100,000)	11% (over ~$40,000)	15% (over ~$25,000)
New Jersey	Exempt	Exempt (Class A)	11%–16%	15%–16%
Pennsylvania	Exempt	4.5%	12%	15%

Key Patterns

Spouses are always exempt from state inheritance tax
Children are exempt in all states except Pennsylvania (4.5%) and Nebraska (1% above threshold)
Siblings and distant relatives face the highest rates, up to 16%
Iowa is phasing out its inheritance tax entirely (fully repealed by 2025 for most, with some transition provisions extending into 2026)
Maryland is the only state with both an estate tax and an inheritance tax

State Estate Taxes (Separate from Inheritance Taxes)

Approximately 12 states and DC impose their own estate taxes with lower exemption thresholds:

State	Estate Tax Exemption	Top Rate
Oregon	~$1,000,000	16%
Massachusetts	~$2,000,000	16%
Washington	~$2,193,000	20%
Minnesota	~$3,000,000	16%
District of Columbia	~$4,710,000	16%
Illinois	~$4,000,000	16%
Maryland	~$5,000,000	16%
Connecticut	~$15,000,000	12%

Even if you are well below the federal ~$15 million threshold, an estate of $2 million in Massachusetts or $1.1 million in Oregon triggers state estate tax. Review the OBBB tax changes for how federal law interacts with state-level thresholds.

Stepped-Up Basis: The Biggest Benefit for Heirs

When you inherit an asset, your cost basis is “stepped up” to the fair market value on the date of the deceased’s death. This eliminates all unrealized capital gains that accumulated during the deceased’s lifetime.

How Stepped-Up Basis Works

Scenario	Original Basis	Value at Death	Heir’s Basis	Gain if Sold Immediately
Stock portfolio	$100,000	$500,000	$500,000	$0
Family home	$150,000	$800,000	$800,000	$0
Rental property	$200,000	$1,200,000	$1,200,000	$0
Art collection	$50,000	$300,000	$300,000	$0

Without stepped-up basis: The heir would inherit the original cost basis and owe capital gains tax on all accumulated appreciation. On a $500,000 stock portfolio with a $100,000 basis, that would be ~$80,000 in federal capital gains tax (at 20%) plus the 3.8% net investment income tax.

Community Property States

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), both halves of community property receive a stepped-up basis when one spouse dies — not just the deceased spouse’s half. This is a significant additional benefit.

Gifts vs. Inheritance

Transfer Method	Recipient’s Basis
Inheritance	Stepped-up to FMV at death
Gift during lifetime	Carryover basis (donor’s original basis)

This makes holding appreciated assets until death, rather than gifting them, a powerful tax strategy for families where estate tax is not a concern (estates under ~$15 million).

What You Need to Report as an Heir

Income Tax on Inherited Assets

Inheritances themselves are not taxable income to the recipient. You do not report receiving an inheritance on your federal income tax return. However:

Situation	Tax Treatment
Receiving the inheritance	Not taxable income
Selling inherited assets	Capital gains on appreciation above stepped-up basis
Receiving income from inherited IRA/401(k)	Taxable as ordinary income (no step-up for retirement accounts)
Receiving income from inherited rental property	Taxable rental income
Interest earned on inherited cash	Taxable interest income

Inherited Retirement Accounts

Inherited IRAs and 401(k)s are the major exception to the “inheritance is not taxable” rule. Distributions from inherited traditional retirement accounts are taxable as ordinary income at your tax bracket. Under the SECURE Act (still in effect):

Spouse beneficiary: Can roll into own IRA and follow normal rules
Non-spouse beneficiary: Must withdraw entire balance within 10 years of the owner’s death
Eligible designated beneficiaries (minor children, disabled, chronically ill, less than 10 years younger): Can stretch over life expectancy

The 10-year rule accelerates taxation and can push heirs into higher brackets. Planning distributions across the 10 years to stay within favorable brackets is critical.

Planning Strategies for Heirs and Families

If You Expect to Receive an Inheritance

Understand the basis: Ask the executor for the date-of-death fair market value of inherited assets
Do not rush to sell: Your stepped-up basis means the longer you hold, the more new appreciation you accumulate — but the basis resets only once
Consider the 10-year rule for inherited retirement accounts: Spread withdrawals to manage your tax bracket
Check for state inheritance tax: If the deceased lived in one of the 6 inheritance tax states, the estate or you may owe state tax

If You Are Planning Your Estate

Hold appreciated assets rather than gifting them (step-up at death vs. carryover basis on gifts)
File Form 706 for portability even if no estate tax is owed
Use annual gift exclusions (~$19,000 per recipient per year) for cash and liquid assets where basis is not a concern
Review state exposure: If you live in a state with low estate tax thresholds, plan accordingly

Review all available deductions in our complete tax deductions list.

Frequently Asked Questions

Do I owe federal tax on money I inherit? No. There is no federal inheritance tax. The estate pays estate tax (if applicable) before you receive your share. The inheritance itself is not income to you.

What if the estate is worth $2 million? The federal estate tax exemption is ~$15 million, so no federal estate tax is owed. However, if the deceased lived in Massachusetts or Oregon, state estate tax may apply at those lower thresholds.

Is life insurance inheritance taxable? Life insurance death benefits are not taxable income to the beneficiary. However, the proceeds are included in the deceased’s gross estate for estate tax purposes if the deceased owned the policy.

Do I need to report the inheritance to the IRS? Not as income. However, if you receive an inherited IRA, each distribution is reported on your tax return. Inherited assets that produce income (rent, dividends, interest) generate taxable income that must be reported.

What about inherited property in another country? Foreign inheritances above $100,000 must be reported on Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Foreign Gifts). The inheritance is still not taxable income, but the reporting requirement carries steep penalties for non-compliance.

Key Takeaways

There is no federal inheritance tax — most heirs owe nothing to the IRS on what they receive
The federal estate tax exemption of ~~$15 million per person (~~$30 million per couple) means fewer than 0.1% of estates are affected
Six states impose inheritance taxes, primarily on non-spouse, non-child beneficiaries
Stepped-up basis eliminates unrealized capital gains on inherited assets, saving heirs potentially tens of thousands in taxes
Inherited retirement accounts (IRA, 401(k)) are the exception — distributions are taxable as ordinary income
Holding appreciated assets until death is more tax-efficient than gifting during lifetime

Next Steps

Review the estate tax exemption permanent guide for planning details
Understand the 2026 tax brackets to manage inherited IRA withdrawals
Explore the standard deduction guide for your filing situation
Check the full tax deductions list for deductions available to heirs

Tax information is for educational purposes only and does not constitute tax advice. Consult a licensed tax professional for your specific situation.