Do you pay taxes on an inheritance?
If you’re expecting to receive a financial windfall through an inheritance, you may be wondering how large of a chunk you’ll actually get to keep. The answer is not so straightforward, unfortunately, as inheritance tax laws are complex and vary widely by jurisdiction. This article explores this very topic. Let’s dive in…
Key Takeaways
- Whether or not you owe tax on an inheritance depends on the location of the deceased's property, your relationship to that person, and the total value of the assets.
- Estate taxes are paid by the estate itself before assets are distributed; beneficiaries generally don't owe anything extra, with federal estate tax only applying to estates above $15 million (as of 2026).
- Inheritance tax is the beneficiary's responsibility, with only five states levying this: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania (spouses are typically exempt).
- Inherited assets usually receive a "stepped-up cost basis" per their value at the date of death, which can significantly reduce capital gains tax if you sell later on.
- Those providing the inheritance can shrink taxable estates ahead of time via gifting, Roth IRAs, and trusts—strategies worth mapping out with a financial, legal, or tax advisor.
Breaking down different types of inheritance taxes
Estate Tax vs. Inheritance Tax
Two different taxes — often confused, taxed at different stages.
| Estate Tax | Inheritance Tax | |
|---|---|---|
| Who pays it | The estate — before assets are distributed | The beneficiary — after receiving the inheritance |
| What’s taxed | The total value of the estate | The value of each individual’s inheritance |
| Federal tax? | Yes — on estates above $15 million (2026) | No — federal government doesn’t tax inheritances |
| State tax? | 12 states + Washington D.C. have one | Only 5 states have one (KY, MD, NE, NJ, PA) |
| Does it depend on relationship? | No — same rules apply regardless of who inherits | Yes — spouses are usually exempt; closer relatives pay less |
If you inherit, the estate tax has already been paid before assets reach you. Inheritance tax is the one you may owe yourself — and only in five states.
To effectively plan for potential taxes on an inheritance, it’s important to understand the different types of taxes that may apply. These include:
Federal estate tax
Estate taxes are imposed on the total value of an individual's estate upon his/her death. Unlike inheritance taxes targeting individual beneficiaries, estate taxes apply to the entire estate—which can encompass a broad spectrum of assets ranging from real estate and investments to cash reserves and personal belongings.
The federal estate tax is progressive, meaning larger estates are subject to higher tax rates with those valued below $15 million exempt from federal estate tax altogether (as of 2026). These taxes are paid by the estate itself and will have already been deducted if you receive an inheritance, with no need to worry about paying any additional taxes.
State-level estate tax
Several states also impose their own estate taxes including Connecticut, Washington D.C., Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington (as of 2026). Tax rates and exemption thresholds vary by state; for example, Oregon taxes estates valued over $1 million, while Connecticut follows the federal exemption amount. Similar to federal estate taxes, heirs need not worry about paying any additional state-level estate taxes as these are settled by the estate itself.
Inheritance tax
The good news at the federal level is that the government doesn’t classify inherited assets as taxable income, so you can breathe a sigh of relief there. If the decedent’s assets (real estate or tangible property, like a car) are physically located in either Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, however, your inheritance could see a trimming at the hands of state inheritance taxes depending on your relationship with the person who passed away (spouses are generally exempt from inheritance tax, for example). In these states, the tax man charges beneficiaries based on the value of inherited assets: the larger the inheritance, the larger the potential tax bill. Each state has its own intricate web of tax rates and exemptions, so it pays to be informed.
Read more about New Jersey inheritance tax laws.
Which States Tax Inherited Wealth?
Most states have neither. A handful have one. Maryland has both.
Estate tax
12 states + Washington D.C.
Paid by the estate before distribution
- Connecticut
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
- Washington D.C.
Thresholds vary widely — Oregon taxes estates over $1M; Connecticut follows the $15M federal threshold.
Inheritance tax
5 states
Paid by the beneficiary on the inheritance received
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
Spouses are typically exempt. Closer family members usually pay lower rates than distant relatives or non-relatives.
Source: Tax Foundation, 2026. Note: Maryland is the only state with both. Inheritance tax depends on the location of the decedent’s property — not where you live.
Capital gains tax
Capital gains taxes only apply to only to profits earned from selling inherited assets such as real estate or stocks, the corresponding tax rate varying at the federal level based on your total taxable income for that year and how long you’ve held the asset. Keep in mind some states also levy their own capital gains taxes.
Cost basis step-ups
Individuals who inherit assets—whether stocks, real estate, or other investments—typically receive a “stepped-up cost basis,” with asset value adjusted to market value (often based on the date of death) to effectively reset the baseline for capital gains tax purposes. If you inherit stock originally purchased for $1,000 but valued at $10,000 at the time of death, for example, your new basis for calculating capital gains tax is $10,000—meaning if you sell that stock later on for $15,000, you’d only owe capital gains tax on $5,000 (the profit made post-inheritance).
Short- vs long-term capital gains
One strategy to potentially minimize the impact of capital gains tax on inherited assets is to hold onto them for an extended period of time; while short-term capital gains tax rates typically apply to assets held for a year or less, some beneficiaries can qualify for long-term rates (often more favorable) by waiting a year or longer to sell assets.
2026 federal capital gains tax rates
Short-term capital gains are taxed as ordinary income according to federal tax brackets. Long-term federal capital gains tax rates for assets sold in 2026, meanwhile, are as follows:
2026 Long-Term Capital Gains Tax Rates & Brackets
| Single Filers | Married Filing Jointly | Married Filing Separately | Head of Household | Tax Rate |
|---|---|---|---|---|
| $0 – $49,450 | $0 – $98,900 | $0 – $49,450 | $0 – $66,200 | 0% |
| $49,451 – $545,500 | $98,901 – $613,700 | $49,451 – $306,850 | $66,201 – $579,600 | 15% |
| Over $545,500 | Over $613,700 | Over $306,850 | Over $579,600 | 20% |
Long-term capital gains apply to assets held more than one year. Rates apply to taxable income for the year. Source: IRS 2026 brackets.
Tax implications across inherited assets
How Inherited Assets Are Taxed
| Asset type | Federal income tax? | State inheritance tax? | Watch out for |
|---|---|---|---|
| Cash & bank accounts | No on the principal | Possibly (5 states) | Interest earned after inheritance is taxable income to you |
| Real estate | No when received | Possibly (5 states) | Capital gains if you sell; rental income is taxable |
| Investments (brokerage) | No when received | Possibly (5 states) | Capital gains when you sell — though basis steps up to date-of-death value |
| Retirement accounts (IRA, 401(k)) | Yes — withdrawals taxed as ordinary income | Possibly (5 states) | 10-year withdrawal rule for most non-spouse heirs; missed deadlines trigger up to 25% penalty |
| Business interests | No when received | Possibly (5 states) | Ongoing business income; capital gains if you sell the business |
| Life insurance | No — proceeds aren’t taxable income | Usually exempt if a named individual | Installment payouts may carry tax on the interest portion |
Stepped-up cost basis: inherited investments are revalued to fair market value at the date of death — resetting the baseline for any future capital gains tax.
Let’s break down different types of inherited assets and their tax implications. While not an exhaustive list, it highlights some of the most common inherited assets and related tax considerations.
Cash and bank accounts
While inherited cash and bank accounts (e.g., savings or checking) are generally not taxable, you may be subject to state inheritance laws and thus need to pay taxes on any interest earned after the money is in your possession.
Real estate
Inherited real estate is generally not subject to taxes although state inheritance laws may apply. If you choose to sell inherited property, you may be liable for capital gains taxes (as discussed earlier). Renting out the inherited property, meanwhile, will task you with reporting corresponding income—subject to taxation—on your tax return.
Investments
While you won’t pay any federal taxes on inherited investments (e.g. a brokerage account), state inheritance taxes may apply. What’s more, tax liabilities often arise for heirs who sell investments or generate income on them post-inheritance—their cost basis typically “stepped up” to fair market value based on the date of death.
Retirement accounts
Inherited retirement assets (e.g., IRAs and 401(k) plans) pose unique tax challenges for beneficiaries since each type of account has its own rules. Beneficiaries may face state inheritance taxes—with income tax obligations often arising when funds are withdrawn from these accounts—and non-compliance with distribution regulations can trigger significant penalties.
Most non-spouse inherited IRA beneficiaries have two options: either take a lump-sum payment of the entire balance or set up a new inherited IRA, withdrawing all funds within 10 years of the IRA owner’s death if choosing the latter. A failure to fully deplete the account within this 10-year period may result in a penalty of up to 25% on the amount you should have withdrawn.
Business interests
Inheriting a piece of a family business or a closely held entity is about more than sentimental legacy; it can also unfortunately throw you into a complex financial web. Not only could you encounter state inheritance taxes, but business profits could lead to ongoing tax obligations. Selling the company, meanwhile, could trigger capital gains taxes.
Life insurance policies
Life insurance policies are one of the most straightforward inheritable assets from a tax perspective since they aren’t considered taxable income and estate taxes typically don’t apply. Furthermore, life insurance is generally exempt from state inheritance taxes so long as the designated beneficiary is an individual and not the estate. The only potential tax burden? If beneficiaries opt for the installment payment option.
How to protect your inheritance from taxes
If you’re anticipating receiving an inheritance from your parents or other family members, whoever is passing on assets should proactively engage in estate planning to effectively manage inheritance tax and facilitate a smooth transfer of wealth. Key strategies to consider are leveraging tax-advantaged accounts, gifting, and trusts. Let’s touch briefly on each one…
Creating a gifting strategy
A well-planned gifting strategy can help reduce the size of one’s taxable estate over time, such as by giving small gifts to beneficiaries while knowing those of up to $19,000 per person, per year are exempt from gift tax (as of 2026); married individuals can double the amount and give up to $36,000 to each recipient annually! Gifting (within these limits) allows families to give regularly and meaningfully without the need to worry about taxes on beneficiaries.
Keep in mind some types of gifts are completely exempt from gift tax rules altogether, paving the way for donations to support individuals or causes in specific ways (e.g., paying tuition for a child or grandchild directly to an educational institution, paying providers directly for medical bills/insurance premiums, and donating to IRS-approved charitable organizations and qualified political organizations, so long as the gift is used for political purposes).
Harnessing Roth IRAs
Leveraging tax-advantaged accounts (e.g., a Roth IRA) can help you create a long-lasting legacy; if you’ve held a Roth IRA for a minimum of five years, for example, your beneficiaries can access the funds without the burden of taxes.
Embracing trusts
Different types of trusts can help decrease the size of one’s estate for estate tax purposes. Irrevocable trust assets, for example, are considered to be owned by the beneficiary rather than the original owner and are thus no longer part of the estate; if the trust is set up correctly, beneficiaries won’t pay taxes on assets inherited or principal distributions (distributions taken from money originally placed in the trust). Note taxes do enter the equation when trust assets generate income (e.g. via interest or rental income) and when assets are sold.
The takeaway: is your inheritance taxable?
Inheritances are indeed sometimes subject to taxes, but it often depends on various factors such as the location of the deceased's property, your relationship to that person, and the overall value of assets to be inherited. Keep in mind the distinction between inheritance taxes and estate taxes; while the latter are paid directly from the estate prior to asset distribution, the former are the responsibility of the beneficiary. Collaborating with experienced legal, financial, and tax advisors is an indispensable way to navigate rocky inheritance taxation terrain and thus ensure the preservation of wealth for generations to come.
Still have questions about estate planning or inheritance tax? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.
Reviewed for accuracy
Paul Muller, AEP®, CFP®
Founder and Relationship Manager at Vision Retirement, with 25+ years in the financial industry.
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. Schedule a no-obligation consultation with one of our financial advisors today!
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
