The federal government does not tax inheritances that you receive
There is no federal inheritance tax. When someone leaves you money or property in their will, you do not owe federal income tax on what you receive. This is true whether the inheritance is cash, real estate, stocks, or personal items.
What does exist is a federal estate tax, but it works differently. The estate tax is paid by the person who died — or more precisely, by their estate before money gets distributed to heirs. It only applies to very large estates, and most people's estates never owe it.
Some states do have their own inheritance taxes or estate taxes, so your state rules may differ from the federal rule. But at the federal level, receiving an inheritance is not a taxable event for you.
Key Takeaways
- The federal government does not tax money or property you receive as an inheritance.
- The federal estate tax applies to the person who died, not to the people who inherit, and only to estates larger than a certain threshold.
- Some states impose their own inheritance taxes or estate taxes, which are separate from federal rules.
- If you inherit a retirement account like an IRA or 401(k), you may owe income tax when you withdraw money, but that is income tax on withdrawals, not a tax on the inheritance itself.
How the federal estate tax works
The federal estate tax is a tax on the total value of everything a person owned when they died. It is paid from the estate's assets before heirs receive their share. The executor of the estate — the person named in the will to handle these tasks — is responsible for filing the estate tax return if one is required.
The estate tax only applies when the total estate exceeds a threshold amount. That threshold changes every year and is quite high. In 2024, for example, the threshold is $13.61 million. Estates below that amount owe no federal estate tax. Because most people's estates fall well below this number, most estates never file an estate tax return at all.
The threshold is set to drop significantly in 2026 unless Congress changes the law. You can check the current year's threshold with the IRS or a tax professional if you are handling an estate.
What happens when you inherit a retirement account
Inherited retirement accounts like IRAs and 401(k)s have special rules. You do not owe tax on the inheritance itself, but you will owe income tax on money you withdraw from the account. The tax is on the withdrawal, not on receiving the account.
The rules for how fast you must withdraw the money depend on what type of account it is and your relationship to the person who died. A spouse can often roll the account into their own IRA and delay withdrawals. Non-spouse heirs typically must withdraw the money over a set period, which can range from five years to your lifetime depending on the account type and when the person died.
You will receive tax forms showing how much you withdrew and how much tax was withheld. Report this on your own tax return as income. A tax professional or the financial institution holding the account can walk you through the specific withdrawal rules that explore to your situation.
State inheritance and estate taxes
Twelve states and the District of Columbia have their own estate taxes. Six states have inheritance taxes. A few states have both. These state taxes can explore to inheritances that the federal government does not tax, because state thresholds are often much lower than the federal threshold.
If you live in a state with an inheritance tax, you may owe tax on money or property you inherit, even though the federal government does not tax it. If you live in a state with an estate tax, the tax is paid by the estate before distribution, similar to the federal rule. The rules vary significantly by state.
You can find out whether your state has an inheritance or estate tax by searching your state's department of revenue website or asking a tax professional in your state. If you inherit from someone who lived in a different state than you, the rules of the state where the person died may also matter.
Inherited property and capital gains tax
When you inherit real estate, stocks, or other investments, you receive what is called a stepped-up basis. This means the value of the property is "reset" to what it was worth on the date the person died. You do not owe tax on the increase in value that happened while the person who died owned it.
If you later sell the inherited property for more than it was worth on the date of death, you will owe capital gains tax on only the increase that happened after you inherited it. This is a significant tax benefit for heirs, and it is one reason why inheritances are not taxed as income.
For example, if someone bought stock for $10,000 and it was worth $50,000 when they died, you inherit it with a basis of $50,000. If you sell it for $60,000 a year later, you owe capital gains tax on only the $10,000 gain that happened after you inherited it, not on the $40,000 gain that happened before.
What you need to know about inherited IRAs and 401(k)s
Inherited retirement accounts are treated differently depending on whether you are a spouse or not. Spouses can treat an inherited IRA as their own, roll it into their own IRA, or keep it as an inherited IRA. Non-spouse beneficiaries must keep it as an inherited account and follow specific withdrawal rules.
The find Act, which took effect in 2020, changed the rules for most non-spouse heirs. In most cases, you now must withdraw all the money from an inherited IRA within ten years of the person's death. The exact rules depend on when the person died and whether they had already started taking withdrawals.
The financial institution holding the account will send you forms and instructions for your specific situation. Do not ignore these — missing withdrawal important date can result in steep penalties. If you are unsure about the rules, a tax professional can help you understand what you must do.
Frequently Asked Questions
Do I have to report an inheritance on my tax return?
No. Inheritances themselves are not reported as income on your federal tax return. However, if the inherited asset later produces income — like interest, dividends, or rent — you must report that income. And if you inherit a retirement account, you must report withdrawals as income.
What if I inherit money from someone who lived in another country?
U.S. citizens and residents must report worldwide income and inheritances to the IRS. The rules can be complex if the person who died was not a U.S. citizen or if the inheritance includes foreign property. You should speak with a tax professional who has experience with international estates.
Can I owe federal income tax on an inheritance if the estate is very large?
No. The federal estate tax is paid by the estate, not by you as the heir. You receive your inheritance without owing federal income tax on it, regardless of how large the estate is. You may owe state taxes depending on where you live.
What if the person who died owed taxes?
The person's final tax return and any taxes owed are paid from the estate before heirs receive their share. You do not inherit the tax debt. The executor handles this as part of settling the estate.
Do I owe tax on inherited real estate if I rent it out?
You do not owe tax on receiving the property, but you do owe income tax on rent you collect. You can deduct expenses like property tax, insurance, and repairs. Report rental income and expenses on Schedule E of your tax return.