Inheriting money or property can be a financial blessing, but also raises an important question: Will you owe taxes on it?
The answer depends on what you’re inheriting, where you live, and what you plan to do with it.
Do You Pay Federal Inheritance Tax?
Good news for you — nope! The U.S. federal government does not charge an inheritance tax. However, it does have an estate tax, which is paid by the deceased person’s estate before assets are passed on.
In 2025, the estate tax only applies if the estate is worth more then $13.61 million. If the estate is smaller than that, no estate tax applies at the federal level.
Overall, heirs don’t pay any federal tax just for simply receiving an inheritance.
Do States Tax Your Inheritance?
This is where it can get complicated, because each state has their own set of rules on how inheritances are taxes.
The states that are currently taxing inheritances include:
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
The tax rate often depends on how much you inherit and what your relationship is to the deceased. Typically spouses and children pay less — or nothing at all.
What If You Inherit Property or Investments
You don’t pay tax when you inherit, but you might when you sell. That’s where the “step-up in basis” comes in:
- The asset’s value is adjusted to its market value at the time of death of the deceased.
- If you sell it later, you’ll only pay capital gains tax on the increase since you inherited it.
Example:
Let’s say your mother bought stock for $10,000 at one time. When she passes, it will be worth $50,000 and you inherited it at $50,000. If you sell it for $55,000, you only owe tax on the $5,000 gain.
Do You Pay Taxes on Inherited IRAs or Retirement Accounts?
Sometimes, yes. If you inherit a:
- Traditional IRA or 401(k): You’ll pay ordinary income tax when you take money out
- Roth IRA: Generally tax-free if the account was open for at least 5 years.
Also something to note is that if you’re not a spouse, you usually have to empty the account within 10 years (SECURE Act rule).
What Is “Income in Respect of a Decedent” (IRD)?
The income in respect of a decedent refers to any untaxed income that a decedent previously earned or was meant to receive in their lifetime. Examples of income may be:
- Last paycheck
- Unpaid bonuses
- Annuity payments
- Some retirement plan balances
The income is taxable to the person who inherits it, and would be reported on your tax return as ordinary income.
Most Inheritances Aren’t Taxed – But Know the Exceptions
While most inheritances come without any tax obligations, some situations can trigger a tax requirement. Some circumstances may apply if you:
- Live in a state with an inheritance tax
- Inherit a retirement account
- Sell inherited assets at a gain
If you’ve received an inheritance in the past or are going to be receiving one in the future, be sure to look at your state rules regarding tax law. While most of the time you can collect everything tax-free, there are exceptions to look out for. If you’re still not sure, reach out to us to get clarity, we are happy to help.
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