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Receiving an inheritance doesn’t necessarily mean receiving a tax bill. Cash and property inherited from an estate generally aren’t treated as federal taxable income, but taxes can arise from certain assets or income, including traditional retirement account distributions, estate income and gains from selling inherited property. State estate or inheritance taxes may also apply depending on where the decedent lived and who receives the property. Understanding which type of distribution you’re receiving can help determine whether the estate, the beneficiary or neither may owe tax.
A financial advisor can help you consider how an inheritance may affect your investments, taxes and broader financial plan.
Estate and Inheritance Taxes
As the beneficiary of an estate, the first tax hurdle to clear is the federal estate tax. The good news is that the vast majority of estates will not trigger the federal estate tax. The estate tax, which ranges from 18% to 40%, applies to the value of an estate over a specific threshold. As of 2026, an estate can be worth up to $15 million before a federal estate tax is required. As a result, the vast majority of Americans won’t have to worry about an inheritance tax.
But if you live in certain states, separate estate and/or inheritance taxes may apply. State-level estate taxes are levied on the deceased person’s estate before assets are distributed, while inheritance tax is imposed on the individual beneficiaries after they receive their share.
In 2026, 12 states and the District of Columbia levy an estate tax, while only handful have an inheritance tax.
| States With Estate Tax | States With Inheritance Tax | States With Both |
|---|---|---|
| Connecticut, District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington | Kentucky, Nebraska, New Jersey, Pennsylvania | Maryland |
Do Beneficiaries Pay Taxes on Estate Distributions?
Beneficiaries generally do not pay federal income tax on cash or property received from an estate, but tax liability can arise depending on the source and type of asset. For example, inherited retirement accounts such as traditional IRAs or 401(k)s typically trigger income tax when distributions are taken, since the original owner never paid tax on those funds. In contrast, Roth IRAs are usually tax-free to beneficiaries, provided certain conditions are met.
In addition, beneficiaries may face capital gains tax if they sell inherited assets that have appreciated in value after the date of inheritance. Most inherited property receives a step-up in cost basis to its fair market value at the decedent’s date of death, effectively erasing unrealized gains up to that point. However, if the asset increases in value after it’s inherited and is later sold, the beneficiary may owe capital gains tax on the difference between the stepped-up basis and the sale price. This commonly applies to assets like stocks, mutual funds or real estate.
Estate distributions can also become taxable if they produce income after the decedent’s death but before the assets are transferred, including dividends, interest or rental income. In those cases, the estate must report and pay income tax during the administration period, and any undistributed income may eventually be taxed to the beneficiaries.
It’s also possible for beneficiaries to owe tax if the estate generates more than $600 in gross income during administration, triggering an IRS filing requirement. In such instances, estates may pass that income to beneficiaries via Schedule K-1, which reports the amount each person must include on their tax return.
Short History of Estate Taxes
The modern federal estate tax dates to the Revenue Act of 1916. Since then, Congress has repeatedly changed the amount that can pass free of federal estate tax and the rates applied to taxable estates.
Under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, the federal estate tax exemption gradually increased from $675,000 in 2001 to $3.5 million in 2009, while the top estate tax rate fell from 55% to 45%. EGTRRA repealed the estate tax for people who died in 2010, although the federal gift tax remained in effect.
The Tax Relief Act of 2010 then retroactively reinstated the estate tax for 2010 with a $5 million exclusion and a maximum 35% rate. However, executors of estates for people who died in 2010 could elect out of the estate tax system and instead use modified carryover-basis rules. The $5 million exclusion and 35% top rate generally continued for 2011 and 2012, with the exclusion indexed for inflation in 2012.
The American Taxpayer Relief Act of 2012 established a 40% top estate tax rate beginning in 2013 and continued an inflation-indexed basic exclusion. The Tax Cuts and Jobs Act of 2017 later temporarily doubled the basic exclusion for 2018 through 2025. It increased from $11.18 million in 2018 to $13.99 million for people who died in 2025.
The One Big Beautiful Bill Act, enacted in 2025, replaced the scheduled post-2025 reduction in the exemption with a $15 million basic exclusion for people who die in 2026. The law also provides for inflation adjustments in later years and does not include the previous TCJA sunset for the increased exemption. The top federal estate tax rate remains 40%.
For 2026, therefore, an individual has a $15 million federal basic exclusion amount, up from $13.99 million in 2025. Married couples may potentially preserve a deceased spouse’s unused exclusion through the federal portability rules when the required estate tax return and election are made.
Bottom Line
Beneficiaries generally don’t owe federal income tax simply because they receive cash or property from an estate. However, taxable income can arise from inherited retirement accounts, income distributed by the estate or gains realized after inherited property is sold. State inheritance taxes may also apply in certain jurisdictions, while federal and state estate taxes are generally obligations of the estate itself.
Estate Tax Tips
- A financial advisor will help you optimize a financial plan to mitigate your tax liability. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While an inheritance usually isn’t considered income, certain types of inherited assets have tax implications. Here’s a breakdown of inheritance taxes and exemptions.
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