Taxes on Inheritance Money: Federal Rules, State Taxes and Inherited IRAs

You generally don’t have to pay taxes on inheritance money just because you received it. Cash and property inherited from someone generally aren’t federal taxable income. But taxes can arise from inherited retirement accounts, state inheritance taxes or income and gains the assets produce later. Federal estate tax is different because the estate generally pays the tax rather than the beneficiary when it applies.

A financial advisor can help you manage inherited IRA withdrawals, sales of appreciated property and state-tax exposure with other income to reduce avoidable taxes and plan the timing of taxable events.

Is Inheritance Money Taxable at the Federal Level?

The federal government does not impose a separate inheritance tax on beneficiaries, and your federal taxable income generally does not include property received by gift, bequest or inheritance. But if that property later generates interest, dividends, rent or other income, those amounts generally become taxable to you. Inherited traditional IRAs and 401(k)s are a major exception, since taxable withdrawals from those accounts are generally taxed as ordinary income. ¹

Federal estate tax works differently because the IRS taxes the estate itself, and any tax owed is generally paid from the estate’s assets rather than directly by heirs. For someone dying in 2026, the federal basic exclusion amount is $15 million, and the top estate-tax rate is 40%. The table compares how each tax applies:

States That Tax Inheritances

State taxes are where your relationship to the person who died can matter. Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania impose inheritance taxes. ²  (Maryland also imposes a separate estate tax.) The table shows how each state treats different heirs:

The estate, rather than the beneficiary, pays state estate taxes. Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington impose estate taxes in 2026, as does the District of Columbia. Their exemptions can be far below the federal $15 million amount.

Taxes on Inherited Investments and Property

Taxable investments and real estate generally receive a basis adjustment at death. The new basis is usually the asset’s fair market value on the date of death, although alternate valuation and other special rules can apply. When the asset has appreciated, this is commonly called a step-up in basis.

As an example, let’s assume that a parent bought stock for $50,000 and it’s worth $200,000 when they die. The heir later sells it for $210,000, so the taxable gain would generally be $10,000 ($210,000 − $200,000). The $150,000 of appreciation during the parent’s lifetime generally does not become part of the beneficiary’s capital gain under the standard date-of-death basis rule.

The IRS also generally treats inherited capital assets as long-term holdings regardless of how long the beneficiary actually owns them, so any gain is usually taxed at long-term capital gains rates. The table shows how common inherited assets are treated:

Taxes on Inherited IRAs and 401(k)s

Retirement accounts follow a different set of rules. The IRS taxes withdrawals from inherited traditional IRAs and pretax 401(k)s as ordinary income. Qualified withdrawals from inherited Roth accounts are generally tax-free once the applicable five-year requirement is met.

For many non-spouse beneficiaries, the key deadline is 10 years. The table shows how the withdrawal rules and tax treatment differ by beneficiary:

A useful distinction is when annual withdrawals are required. If a traditional IRA owner died after their required beginning date, many beneficiaries subject to the 10-year rule must continue annual required minimum distributions (RMDs) during the period. If the owner died before the required beginning date, a beneficiary subject only to the 10-year rule generally doesn’t have to take annual distributions before year 10.

Eligible designated beneficiaries can include a surviving spouse, the owner’s minor child, certain disabled or chronically ill individuals and someone who is not more than 10 years younger than the account owner.

How you time withdrawals within the 10 years can change your tax bill. Say you’re a single filer with $100,000 in other taxable income and you inherit a $300,000 traditional IRA. Withdrawing it all in one year would push most of that money into the 32% and 35% brackets, adding about $92,057 in federal tax under 2026 brackets.

Taking $30,000 a year instead would keep each withdrawal in the 22% and 24% brackets, adding about $7,086 in the first year under 2026 brackets. If your other taxable income and the tax brackets stayed the same, that would total about $70,860 over 10 years ($7,086 × 10). The table compares the two approaches:

In this example, spreading withdrawals could save about $21,197 in federal tax under those assumptions.

Other Inherited Assets and Reporting Rules

Not every inherited asset follows the cash, investment or IRA rules. The table shows how other common assets are taxed and reported:

Life insurance proceeds paid because of the insured person’s death are generally tax-free, although interest paid with the proceeds is taxable. U.S. savings bonds may also carry deferred interest that becomes taxable to the estate or beneficiary.

Health savings accounts (HSAs) have a particularly important beneficiary distinction. If the beneficiary is the owner’s spouse, it generally becomes the spouse’s HSA. If someone else inherits it, the account generally stops being an HSA and its fair market value becomes taxable to that beneficiary in the year of death, reduced by certain qualified medical expenses of the deceased owner that the beneficiary pays within one year after death.

A U.S. person who receives more than $100,000 in gifts or bequests from a nonresident alien or foreign estate during the year generally must report the amount on Form 3520, even though the inheritance itself is generally not taxable income.

Bottom Line

Inheritance is generally not taxable just because you receive it, but the type of asset, where you live and what happens after the transfer can all create tax consequences. Retirement accounts may trigger ordinary income tax when money is withdrawn, investments and real estate can create taxable gains after a basis adjustment, and some states impose inheritance or estate taxes. Other assets, including HSAs, annuities, savings bonds and foreign inheritances, can have their own reporting rules, so it helps to identify what you inherited before deciding how to manage or use it.

Estate Planning Taxes

• A financial advisor can help you decide how to manage inherited assets while accounting for taxes, withdrawals and future investment income. Finding a financial advisor doesn’t have to be hard. 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.
• If you’re planning your own estate, giving up to $19,000 per person each year in 2026 can gradually reduce its taxable value without triggering gift tax. Using other estate tax planning strategies, like irrevocable trusts and charitable donations, may also help minimize what your heirs could owe.

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