There is no federal inheritance tax, which means beneficiaries are usually not taxed simply for receiving something. What exists is an estate tax, charged to the estate before anything is distributed.
The distinction matters because it decides who deals with what. It also leaves several situations where an inheritance does produce taxable income for the person receiving it, which catches families out.
This covers the difference between the two, which estates are affected, when an inheritance is taxable income to a beneficiary, how the basis of inherited assets is set, and where states impose charges of their own.
Is There a Federal Inheritance Tax?
No. There is no federal inheritance tax. The United States does not impose a federal tax on money or assets you receive as an inheritance. Whether you inherit $10,000 or $10 million, the IRS will not send you a tax bill simply because you received an inheritance.
The estate tax, which is often confused with an inheritance tax, is very different. The estate tax is paid by the estate of the deceased person, not by the beneficiary who receives the inheritance.
Establish what the estate consists of and what each asset was worth at the relevant date, and do it early. Valuations obtained at the time are far more defensible than ones reconstructed later, and they also set the position for everybody who inherits.
Anu Gupta, CA, EA, B.Tech · LinkedInFederal Estate Tax vs Inheritance Tax: Key Difference
| Feature | Estate Tax vs Inheritance Tax |
|---|---|
| Who pays it? | Estate Tax: paid by the deceased's estate | Inheritance Tax: paid by the recipient/beneficiary |
| Federal level | Yes, federal estate tax exists | No federal inheritance tax |
| State level | 12 states + DC have estate tax | 6 states have inheritance tax |
| Threshold | Estate Tax: >$13.61M (2025) | Inheritance Tax: varies by state and relationship |
Federal Estate Tax: What Estates Pay
The federal estate tax applies to estates with a gross value above the exemption amount. For 2025:
- Exemption: $13.61 million per individual
- Portability: surviving spouse can add deceased spouse's unused exemption, making effective exemption $27.22M for a married couple
- Top rate: 40% on taxable estate above exemption
- Exemption is tied to the gift tax (unified system)
Is Inherited Money Taxable Income to the Beneficiary?
Generally, no. Most inherited assets are not taxable income to you:
- Cash: not taxable income
- Stocks, real estate, and other appreciated assets: generally not taxable income at receipt, but gain on subsequent sale is taxable
- Step-up in basis: inherited assets receive a stepped-up basis to fair market value at the date of death (or alternative valuation date)
Pro Tip: The step-up in basis is one of the most valuable tax benefits in the U.S. tax code. If you inherit stock worth $500,000 that the deceased bought for $50,000, your basis is $500,000, you owe zero capital gains tax on that $450,000 appreciation if you sell immediately.
Exceptions: Inherited Income That Is Taxable
- Inherited IRAs: distributions from an inherited traditional IRA are taxable as ordinary income (10-year rule applies for most non-spouse beneficiaries per SECURE Act)
- Inherited annuities: the earnings portion of inherited annuity payments is taxable
- Income in respect of a decedent (IRD): income that the deceased had earned but not yet received (e.g., unpaid wages, IRA balance) is taxable when received by the beneficiary
States With Inheritance Taxes (No Federal Equivalent)
Six states impose their own inheritance tax on beneficiaries:
| State | Inheritance Tax Notes |
|---|---|
| Maryland | Up to 10%; immediate family (spouse, children) generally exempt |
| Nebraska | Up to 18% for distant relatives/non-relatives; close family has lower rates or exemptions |
| Iowa | Being phased out; 0% for direct descendants; scheduled full repeal |
| Kentucky | Up to 16%; spouse, children, grandchildren exempt |
| Pennsylvania | 4.5% for direct descendants; 12% siblings; 15% others; spouse exempt |
| New Jersey | Up to 16%; close family generally exempt; Class A beneficiaries exempt |
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Frequently Asked Questions
Do I report inherited money on my federal tax return?
If you inherit cash or non-income-producing assets, generally no, you do not report the inheritance itself on Form 1040. You do report any income those inherited assets generate (interest, dividends, rent) going forward.
What is the step-up in basis?
When you inherit appreciated property, your cost basis is stepped up to the fair market value on the date of the decedent's death. This eliminates capital gains on all appreciation that occurred during the decedent's lifetime.
I inherited an IRA, what are my options?
Non-spouse beneficiaries generally must withdraw the entire IRA within 10 years (SECURE Act). Spouses can roll it over to their own IRA or treat it as an inherited IRA. Distributions from a traditional inherited IRA are taxable as ordinary income.
What should the executor do first?
Establish what the estate actually consists of and what each asset was worth at the relevant date, because almost everything else follows from that. Valuations obtained at the time are far more defensible than ones reconstructed later, and they also set the position for the people who inherit. Alongside that, find out which filings are required, since some are triggered by the estate's size and others by the type of asset.
Does the answer change if assets are in another country?
Frequently, and it introduces obligations that catch families out. There may be reporting requirements for foreign accounts and assets that apply to the beneficiary personally, separate from anything the estate does, and the other country will have its own rules. Because two systems are involved and they interact, this is a situation to take specific advice on rather than to handle from general guidance.
Written by
Anu Gupta, CA, EA, B.Tech
Anu works with US businesses on tax and entity questions at Profitjets, from choosing a structure to the filings that follow it. She writes about the decisions owners make once and then live with for years. Connect on LinkedIn
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