You can inherit any amount without owing federal income tax on it. The United States has no federal inheritance tax, and the IRS does not count inherited property as income. The federal estate tax applies only to estates worth more than $15 million per person in 2026, and the estate pays it before anything is distributed.
That covers the receipt. Taxes can still reach you in three places: a state inheritance tax in five states, income tax on withdrawals from inherited pre-tax retirement accounts, and capital gains tax on growth after the date of death.
Is there a federal inheritance tax?
No. The federal government taxes the estate, not the heir. The IRS describes the estate tax as “a tax on your right to transfer property at your death,” and the executor files Form 706 when the gross estate exceeds the filing threshold for the year of death.
For 2026, that threshold, the basic exclusion amount, is $15,000,000 per person. The 2025 tax law (Public Law 119-21, which the IRS calls the Working Families Tax Cuts law) raised it from $13,990,000 in 2025, according to the IRS summary of 2026 estate and gift amounts. Above the exclusion, the top rate is 40% under IRC 2001(c).
A married couple can shelter up to $30 million. If the first spouse to die does not use all of their exclusion, the executor can elect portability on a timely filed Form 706 and pass the unused amount to the surviving spouse. Without that filing, the unused exclusion is generally lost, even when no tax is due.
Which states tax an inheritance?
Five states tax the heir directly in 2026. The tax follows the state where the person who died lived (or where their real estate is located), not where you live. Iowa’s tax ended for deaths on or after January 1, 2025, under Iowa Code 450.98.
| State | Exempt heirs | Others pay |
|---|---|---|
| Pennsylvania | Spouse, parent of child 21 or under | 4.5% (children) to 15% |
| New Jersey | Spouse, partner, children, grandchildren, parents, grandparents | 11% to 16% |
| Kentucky | Spouse, parents, children, grandchildren, siblings, and from 2026 nieces and nephews | 4% to 16% |
| Nebraska | Spouse, heirs under 22 | 1% (children) to 15% |
| Maryland | Spouse, descendants, parents, grandparents, siblings | 10% |
Pennsylvania is the one most likely to reach an adult child. A $500,000 brokerage account left to a son by a Pennsylvania parent owes 4.5%, or $22,500. The same account left by a parent in New Jersey, Kentucky, or Maryland owes nothing, and in Nebraska it owes 1% of the $400,000 above the exemption, or $4,000. Pennsylvania reduces the tax by 5% if it is paid within three months of death.
Which states have an estate tax?
Twelve states and the District of Columbia tax the estate itself, usually at much lower thresholds than the federal $15 million. Like the federal tax, a state estate tax is paid from the estate before heirs receive anything, but it shrinks what is left to divide. Maryland is the only state with both an estate tax and an inheritance tax.
| Jurisdiction | 2026 exemption | Top rate |
|---|---|---|
| Connecticut | $15,000,000 | 12% |
| District of Columbia | $4,988,400 | 16% |
| Hawaii | $5,490,000 | 20% |
| Illinois | $4,000,000 | 16% |
| Maine | $7,160,000 | 12% |
| Maryland | $5,000,000 | 16% |
| Massachusetts | $2,000,000 | 16% |
| Minnesota | $3,000,000 | 16% |
| New York | $7,350,000 | 16% |
| Oregon | $1,000,000 | 16% |
| Rhode Island | $1,838,056 | 16% |
| Vermont | $5,000,000 | 16% |
| Washington | $3,000,000 (from July 1) | 20% (from July 1) |
Two of these have traps. New York has a cliff: an estate worth more than 105% of the exemption ($7,717,500 in 2026) loses the exemption entirely, so the whole estate is taxed. Washington changed its rates twice in a year; deaths from July 1, 2025 through June 30, 2026 faced a 35% top rate, cut back to 20% for deaths after that.
What inheritances are taxable to the heir?
The rule from IRS Publication 559 is that inherited property is not income, but income the person who died had earned and not yet been taxed on is. That category is called income in respect of a decedent (IRD). IRC 1014(c) excludes it from the step-up in basis, so the tax that was deferred during life comes due when the heir collects.
| You inherit | Income tax | When |
|---|---|---|
| Cash, bank accounts | None | Interest after death is taxed |
| Stock, real estate, crypto | None; basis steps up | Gains after death, on sale |
| Traditional IRA, 401(k), 403(b) | Ordinary income | On withdrawal, within 10 years |
| Roth IRA, Roth 401(k) | Generally none (5-year rule) | Within 10 years |
| Non-qualified annuity | Ordinary income on earnings | As paid out |
| Life insurance | Generally none | Installment interest is taxed |
| Final pay, bonus, deferred comp | Ordinary income | When received |
Annuities catch heirs off guard because they look like investments but do not get the step-up. Under Revenue Ruling 2005-30, a death benefit from a deferred annuity is IRD to the extent it exceeds the owner’s investment in the contract. Life insurance is the opposite case: IRS Publication 525 generally excludes proceeds paid because of the insured’s death.
If the estate paid federal estate tax on an IRD asset, the heir who receives that income can deduct the estate tax attributable to it under IRC 691(c), so the same dollars are not fully taxed twice.
How are inherited IRAs and 401(k)s taxed?
Withdrawals from an inherited traditional IRA or 401(k) are ordinary income in the year you take them. The 10% early withdrawal penalty does not apply to distributions after the owner’s death, whatever your age. The question is timing.
For owners who died after December 31, 2019, the SECURE Act requires most beneficiaries to empty the account “within ten years,” according to the IRS RMD FAQs. The deadline is December 31 of the year containing the 10th anniversary of the death.
Whether you also owe a distribution every year depends on the owner’s age at death. Under the final regulations, which apply from 2025, if the owner died on or after their required beginning date (generally April 1 after the year they turned 73), you must take annual minimum distributions in years 1 through 9 and empty the account in year 10. If the owner died before that date, nothing is required until year 10. A missed distribution carries a 25% excise tax, cut to 10% if corrected within two years.
Five kinds of heirs, called eligible designated beneficiaries, can stretch withdrawals over their own life expectancy instead: a surviving spouse, the owner’s child under 21, a disabled or chronically ill person, and anyone not more than 10 years younger than the owner. A minor child switches to the 10-year rule at 21. A spouse can also roll the account into their own IRA.
An inherited Roth IRA follows the same 10-year deadline, but withdrawals are generally tax-free if the account was open at least five years. Because Roth owners have no required beginning date, there are no annual minimums before year 10, which lets the money grow tax-free for the full decade. The RMD calculator shows the annual amounts for a traditional account.
A worked example. You are single with $180,000 of taxable income from your job, and you inherit a $1,000,000 traditional IRA. Using 2026 federal brackets from Rev. Proc. 2025-32 for every year and ignoring investment growth:
| Approach | Federal tax | Top bracket |
|---|---|---|
| All $1,000,000 in one year | About $356,800 | 37% |
| $100,000 a year for 10 years | About $309,700 total | 35% |
Spreading the withdrawals saves about $47,000 in federal tax in this example, before state tax. If your income will drop in some of those years, a sabbatical or early retirement, those are the years to take larger withdrawals.
How does the step-up in basis work for inherited stock, real estate, and crypto?
Under IRC 1014(a)(1), property you inherit takes a basis equal to “the fair market value of the property at the date of the decedent’s death.” Publication 559 adds that inherited property has a long-term holding period, so any gain after death is taxed at long-term rates even if you sell the next week. The same rule covers stock, a house, and crypto.
A worked example. Your mother bought shares for $100,000 in 2005. They are worth $600,000 when she dies in 2026. You sell six months later for $620,000.
| Scenario | Basis | Gain | Tax at 23.8% |
|---|---|---|---|
| You inherit | $600,000 | $20,000 | $4,760 |
| Gift while alive | $100,000 | $520,000 | $123,760 |
The $500,000 of gain during her life disappears for income tax purposes when you inherit. A lifetime gift keeps her original basis under IRC 1015, so the gain travels with the shares. Your actual rate depends on your income; 23.8% is the top federal rate on long-term gains. This is the last step of the buy, borrow, die strategy, and it is why families with large unrealized gains often hold appreciated assets until death rather than gifting them.
In community property states such as California and Texas, IRC 1014(b)(6) steps up both halves of community property when the first spouse dies, not only the deceased spouse’s half.
What should you do first after an inheritance?
- Get date-of-death values in writing. Brokerage statements, appraisals for real estate, and exchange records for crypto. That value is your basis for every future sale.
- Identify each retirement account’s rules. Note the owner’s age at death, whether they had started required distributions, and your beneficiary category.
- Check the state. If the person who died lived in Pennsylvania, New Jersey, Kentucky, Nebraska, or Maryland, ask the executor whether an inheritance tax return is due.
- Plan the withdrawals. Map inherited IRA withdrawals against your own income for the next 10 years before taking the first one.
If you are deciding what to do with the money itself, managing a windfall covers the order: tax reserve, debt, cash, then investing. If the estate has no will, what happens when you die without a will explains how state law decides who inherits.
How Nino helps heirs
Nino’s Advisor plans pair you with a CFP and CPAs who model inherited IRA withdrawals against your income, track the basis of inherited assets, and prepare your federal and state returns. Plans cost $3,600, $4,800, or $12,000 a year (Essential, Plus, Premier), with tax filing included; Premier adds advanced estate planning. See how Nino works for an inheritance or book a free consultation.