How Much Money Can You Inherit Without Paying Taxes on It?

Inheriting money or assets can be a welcome relief or a significant windfall. Many people wonder about the tax implications of receiving an inheritance. Fortunately, in the United States, the federal government generally does not impose an inheritance tax on the beneficiary. This means that in most cases, you can inherit a substantial amount of money without owing federal income tax on it. However, there are a few nuances and specific situations to be aware of.

Federal Estate Tax: Who Pays?

The primary federal tax that might come into play when someone dies and passes on their wealth is the federal estate tax. This is a tax levied on the total value of a deceased person's estate before it is distributed to their heirs. The responsibility for paying the federal estate tax falls on the estate itself, not on the individual beneficiaries. So, if the estate is large enough to owe estate tax, the tax is paid out of the estate's assets before the remaining wealth is distributed.

The good news for most Americans is that the federal estate tax has a very high exemption amount. For 2026, this exemption is $13.61 million per person. This means that an individual can pass on an estate worth up to $13.61 million to their heirs without any federal estate tax being due. Only estates exceeding this astronomical figure are subject to the federal estate tax.

Consider this: If a married couple has a combined estate of, say, $20 million, and they have properly structured their estate planning (often utilizing portability of the unused exemption of the first spouse to die), they can leave their entire $20 million to their children without owing any federal estate tax.

What About State Inheritance and Estate Taxes?

While the federal government doesn't tax beneficiaries directly on inheritances, some states do have their own inheritance or estate taxes. It's crucial to understand that these are separate from the federal taxes and vary significantly from state to state.

State Inheritance Taxes

Inheritance taxes are levied on the beneficiaries themselves, based on the value of the inheritance they receive and their relationship to the deceased. As of 2026, only a handful of states still impose an inheritance tax:

Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania

The rates and exemptions for these state inheritance taxes also differ. For example, in Pennsylvania, there are generally no exemptions for transfers to direct descendants (children, grandchildren), and the tax rate is 4.5%. However, transfers to spouses are exempt, and there are different rates for other relatives.

State Estate Taxes

In addition to inheritance taxes, a few states also impose their own estate tax. This tax is levied on the deceased person's estate, similar to the federal estate tax, but with much lower exemption amounts. As of 2026, the states with a state estate tax include:

District of Columbia
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
Oregon
Rhode Island
Vermont
Washington

The exemption amounts in these states can range from just a few hundred thousand dollars to over a million dollars. For instance, in Maryland, there's a state estate tax exemption that is much lower than the federal exemption.

Key takeaway: If you are inheriting assets, it's vital to determine if the deceased lived in a state with an inheritance or estate tax and what the specific rules and exemption amounts are in that state.

Income Tax on Inherited Assets

While you generally don't pay income tax on the value of the inheritance itself, you might have to pay income tax on any income generated by the inherited assets after you receive them. This is especially true for certain types of assets:

Retirement Accounts: Inherited Individual Retirement Arrangements (IRAs) and 401(k)s are generally subject to income tax when the distributions are taken. The rules for how quickly you must withdraw funds and how they are taxed can be complex and depend on factors like whether the original owner used the account for tax-deferred or Roth contributions and your relationship to the deceased. For most non-spouse beneficiaries, you generally must withdraw all assets within 10 years of the original owner's death.
Investment Income: If you inherit stocks, bonds, or other investments, you won't pay taxes on their value at the time of inheritance. However, any dividends, interest, or capital gains you earn from these investments after you inherit them will be subject to income tax.
Rental Properties: If you inherit a rental property, the rental income you receive after inheriting it will be taxable income. You can generally deduct related expenses, such as property taxes and maintenance.

Important distinction: The inheritance itself is not considered income. It's the subsequent earnings or distributions from those assets that can become taxable.

What About "Stepped-Up Basis"?

A significant benefit for heirs inheriting appreciated assets like stocks or real estate is the concept of "stepped-up basis."

When you inherit an asset, its cost basis is typically "stepped up" to its fair market value on the date of the deceased person's death. This means that if you later sell the asset, your capital gains tax will only be calculated on the appreciation that occurred after you inherited it, not on the entire appreciation since the original owner purchased it.

For example, if your parent bought a stock for $1,000 and it's worth $100,000 when they pass away, your basis in that stock becomes $100,000. If you then sell it for $110,000, you would only owe capital gains tax on the $10,000 profit, not the full $109,000 profit.

Summary: Key Factors to Consider

To determine if you'll pay taxes on an inheritance, consider these factors:

The value of the estate: Is it likely to exceed the federal estate tax exemption ($13.61 million for 2026)?
The deceased person's state of residence: Does their state have an inheritance tax or an estate tax, and what are the exemption levels?
Your relationship to the deceased: State inheritance tax rates often depend on this.
The type of assets inherited: Income-generating assets like IRAs, 401(k)s, and investment portfolios may lead to future taxable income.

For the vast majority of Americans, inheriting assets will not result in any immediate federal tax liability. The federal estate tax exemption is very high, and most states do not have an inheritance tax. However, it is always wise to consult with an estate attorney or a tax professional to understand the specific implications of your inheritance, especially if the estate is substantial or located in a state with its own taxes.

Frequently Asked Questions (FAQ)

How much can I inherit before I have to pay federal taxes?

At the federal level, you can generally inherit up to $13.61 million per person (as of 2026) without any taxes being due. This is due to the high federal estate tax exemption. The tax is levied on the estate itself, not on the beneficiary directly.

Do I have to pay taxes on money inherited from my parents?

In most cases, no. The federal government does not tax beneficiaries on inheritances. However, if the deceased's estate is larger than the federal exemption amount, the estate will pay federal estate tax before distributing the remaining assets. Additionally, some states have their own inheritance or estate taxes that could apply.

Why might I have to pay taxes on inherited retirement accounts?

Inherited retirement accounts, such as IRAs and 401(k)s, are typically taxed when you take distributions. This is because the original owner benefited from tax deferral on those contributions and earnings. The IRS generally requires non-spouse beneficiaries to withdraw all assets within 10 years of the original owner's death, and these distributions are usually taxed as ordinary income.

What is a "stepped-up basis" and how does it help me?

A stepped-up basis means that when you inherit an asset like stock or real estate, its cost basis for tax purposes is adjusted to its fair market value on the date of the deceased's death. This significantly reduces or eliminates any capital gains tax you would owe if you were to sell the asset shortly after inheriting it, as you'd only be taxed on appreciation that occurred after you inherited it.