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An inheritance can offer helpful financial support, but it may also come with tax considerations. The taxes you might owe depend on the type of asset, federal and state laws, and the size of the inheritance. Most estates are not subject to federal estate tax because of the high exemption limit, but some states have their own rules, and certain assets like retirement accounts may be taxed as income.
A financial advisor who specializes in estate planning can help you understand how tax laws apply to your inheritance and develop a strategy to protect it.
Do Heirs Pay Federal Tax on Inheritances?
At the federal level, heirs typically do not pay taxes directly on what they inherit. Instead, the federal estate tax applies to the estate itself before it distributes assets to beneficiaries. For 2026, the Congress sets the federal estate tax exemption at $15 million per individual, or $30 million for married couples. This means estates valued below those thresholds owe no federal estate tax. Only a small percentage of estates, typically less than 1%, are large enough to trigger the federal estate tax. However, the IRS taxes amounts above the exemption at rates up to 40%.
It’s also important to understand the step-up in basis rule. When you inherit assets such as stocks or real estate, the value of those assets is “stepped up” to their fair market value at the time of the owner’s death. This can significantly reduce the capital gains tax owed if you later sell the assets.
However, not all inherited assets receive a step-up. For example, pre-tax retirement accounts like traditional IRAs or 401(k)s maintain their tax-deferred status. However, withdrawals by beneficiaries are taxed as ordinary income.
Do Heirs Pay State Tax on Inheritances?
Most heirs do not have to pay a state inheritance tax, but where the deceased person lived and the heir’s relationship to them can matter. As of 2026, five states impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Iowa previously imposed one but eliminated its inheritance tax beginning in 2025.
An inheritance tax is different from an estate tax. An estate tax is generally assessed against the deceased person’s estate before assets are distributed, while an inheritance tax is imposed on the person receiving the property. Maryland is unusual because it imposes both an estate tax and an inheritance tax.
How much an heir owes can depend heavily on their relationship to the person who died. States with inheritance taxes generally provide more favorable treatment to close family members, such as spouses, children or other direct descendants, while more distant relatives and unrelated beneficiaries may face lower exemptions or higher rates. For example, maximum inheritance tax rates can reach 16% in Kentucky and New Jersey, although the actual rate and exemption depend on the beneficiary category.
State estate taxes can also affect an inheritance even when the heir does not personally owe inheritance tax. Several states and Washington, D.C., impose estate taxes, typically only when an estate exceeds a state-specific exemption. Because these rules vary considerably by state and can change over time, heirs receiving a large estate, real estate or other valuable assets may want to review both the deceased person’s state of residence and the laws where certain property is located before determining what taxes could apply.
Special Considerations for Spouses and Heirs
The relationship between the deceased and the heir can impact tax liability. In most cases, spousal inheritances receive the most favorable tax treatment. Under federal law, assets that pass to a surviving spouse are generally tax-exempt. This unlimited marital deduction allows spouses to transfer wealth without triggering federal estate taxes, a key benefit for married couples engaging in estate planning.
However, the situation becomes more complex for other heirs. Children, siblings and unrelated beneficiaries may face state-level inheritance taxes, depending on the laws in their jurisdiction. Some states exempt close family members, like children or parents, while others impose taxes on all non-spousal heirs.
Another important factor is the role of beneficiary designations. Assets like retirement accounts, life insurance policies and payable-on-death (POD) bank accounts pass directly to the named beneficiaries, often bypassing probate entirely. These designations can override instructions in a will or trust, making it crucial to keep them updated to safeguard the owner’s wishes and to avoid unintended tax consequences for heirs.
You may not owe tax on your inheritance, but your overall income could still affect what you pay. Use our income tax calculator to get an estimate.
Other Considerations
Estate and inheritance taxes are only part of the tax picture. Some inherited assets can generate income taxes when you withdraw, sell or receive income from them, even if receiving the inheritance itself was not taxable.
Inherited traditional IRAs, 401(k)s and similar retirement accounts are a common example. Beneficiaries generally owe ordinary income tax on taxable distributions, and many non-spouse beneficiaries are subject to the 10-year rule, which requires the account to be fully distributed by the end of the 10th year after the original owner’s death. Depending on when the owner died and the beneficiary’s status, annual required minimum distributions may also apply during that period.
Inherited non-qualified annuities can also create taxable income. Generally, the portion attributable to the original owner’s investment in the contract is not taxed again, while earnings that have not yet been taxed may be taxable to the beneficiary when received. The timing and calculation can vary depending on how the annuity is distributed.
Trust beneficiaries may owe income tax on distributions that carry out taxable trust income, while the trust itself may pay tax on income it retains. Inherited investments can create another tax issue when they are eventually sold: although inherited property generally receives a basis tied to its fair market value at the owner’s death, any subsequent appreciation may result in a taxable capital gain.
Since different assets follow different tax rules, the amount you inherit does not by itself determine what you will owe. The type of property, how and when you receive it and what you do with it afterward can all affect the final tax bill.
Strategies for Reducing Inheritance Taxes
While taxes on inheritances can be significant, several strategies may help reduce or eliminate the tax burden:
- Gifting: Individuals can give away up to $19,000 per recipient annually (in 2026) without triggering federal gift taxes. Larger lifetime gifts can also reduce the size of a taxable estate.
- Trusts: Certain types of trusts, such as irrevocable life insurance trusts (ILITs) and grantor retained annuity trusts (GRATs), can help move assets out of an estate for tax purposes.
- Charitable giving: Donations to qualified charities can reduce the taxable value of an estate and provide income tax deductions.
- Portability elections: Married couples can use portability to transfer any unused portion of a deceased spouse’s federal estate tax exemption to the surviving spouse.
- Life insurance: Proceeds from a properly structured life insurance policy can help cover potential estate taxes, providing liquidity to pay tax bills without forcing the sale of inherited assets.
How a Financial Advisor Can Help With an Inheritance
A financial advisor can be especially helpful where tax rules and personal financial goals overlap. The strategies covered above lay out what applies to inherited assets, but an advisor can help you figure out which ones are relevant to your situation and what to prioritize.
One of the first things an advisor can do is look at how the inheritance changes your financial picture overall. A sudden increase in assets might shift your retirement timeline, change your investment needs, affect your insurance coverage, or create estate planning issues that weren’t there before. An advisor can help you see how these pieces connect rather than treating the inheritance as a separate event.
For inherited retirement accounts, an advisor can model different withdrawal schedules across the 10-year window and show how each option affects your tax bracket, Medicare premiums, and eligibility for income-based credits year by year. That kind of multi-year projection is hard to do accurately without professional tools and a clear sense of how everything fits together.
If the inheritance includes real estate, a business interest, or concentrated stock, an advisor can help you weigh whether to hold, sell, or diversify and what the tax trade-offs look like for each. These decisions often affect one another, and the order you make them in can change the overall tax outcome.
An advisor can also work alongside your existing professionals. If you already have a CPA, estate attorney, or insurance agent, an advisor can serve as a central point of contact to make sure everyone is working from the same information and toward the same goals. Inherited assets often touch multiple areas of expertise at once, and having someone managing the overall process can prevent gaps or conflicting advice.
If you’re not sure whether your inheritance is large or complex enough to justify professional help, a one-time consultation with a fee-only or advice-only advisor can provide clarity without an ongoing commitment. Even a single session focused on the tax implications and next steps for your specific situation can help you avoid costly mistakes and feel more confident about the decisions ahead.
Bottom Line
Most inheritances are not subject to federal income tax simply because you receive them, but taxes can still apply depending on the size of the estate, where the deceased lived and what types of assets you inherit. State estate or inheritance taxes may apply in some cases, while retirement accounts, annuities, trusts and appreciated investments can create income or capital gains taxes later. Understanding the rules for each asset can help you avoid surprises and plan how to manage an inheritance more tax-efficiently.
Estate Planning Tips
- A financial advisor may be able to help you create an estate plan for your family. 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.
- While it may be tempting to save some money and plan your estate by yourself, you should still be careful with these DIY estate planning pitfalls.
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