Do you pay taxes on inheritance?

So, do you pay taxes on inheritance?

For most people, no. The IRS treats an inheritance as a transfer of property, not income, so receiving money, a house or an investment account from someone who died does not by itself create a federal tax bill¹.

What can create a tax bill is what happens next, or where the person who died lived:

• You sell an inherited asset for more than its value on the date of death.
• You withdraw money from an inherited retirement account or savings bond that was never taxed to begin with.
• The inherited property earns interest, dividends or rent after you receive it.
• The person who died lived in one of the five states that tax the heir directly.
• The estate itself owed federal or state estate tax before anything was distributed to you.

Why isn't an inheritance taxed like a paycheck?

Section 102 of the federal tax code excludes property received by gift, bequest, devise or inheritance from the recipient's gross income, unlike a paycheck or self-employment income¹. The exclusion covers the inherited property itself, not income it produces after you own it: a rental house's value is not taxed, but the rent you collect after inheriting it is ordinary income.

Does inheriting a house mean you owe taxes on it?

Not when you receive it. You may owe tax later if you sell it for more than its value on the date the person died. Inherited real estate gets a "stepped-up basis," meaning your cost basis resets to the property's fair market value on the date of death rather than what the original owner paid decades earlier³. See our step-up in basis guide for how that reset works with jointly owned and community property.

Example: a parent bought a house for $60,000 in 1985, worth $420,000 when they die. Their child sells it a year later for $430,000. The taxable gain is $10,000, not $370,000, and it counts as a long-term gain no matter how long the child held it⁴.

Keeping or renting the house instead creates no tax from the inheritance itself; only rental income or a later sale is taxed under normal rules.

Do you owe taxes on an inherited retirement account?

Yes, eventually. Traditional IRAs and 401(k)s hold money that was never taxed, so your withdrawal is ordinary income in the year you take it⁷.

Most non-spouse beneficiaries must empty an inherited IRA within 10 years of the death. Whether you also owe an annual required minimum distribution during those 10 years depends on whether the original owner had started taking RMDs; missing one can trigger a 25% excise tax on the amount owed⁷. Qualified Roth IRA withdrawals are generally tax-free, though the 10-year rule still applies. See our rules for inherited IRA RMDs guide for the full breakdown.

Do you owe tax on an inherited savings bond?

Only when the deferred interest finally comes due. Series EE and Series I bonds usually defer interest until cashed or final maturity, so an unredeemed bond still carries years of untaxed interest at death⁹.

The personal representative can choose to report all interest earned through the date of death on the decedent's final Form 1040. If so, you owe tax only on interest accruing afterward, when you cash the bond. If not, you owe tax on all of it, before and after death, in the year it is cashed or matures, whichever comes first⁹.

Do you owe federal estate tax on what you inherit?

Almost certainly not, and if you did, it would not be your bill. The federal estate tax is charged to the estate itself, before anything is distributed, and only when the total value of everything the person owned is above the filing threshold: $15,000,000 per person for deaths in 2026⁶.

Gift tax is a related, separate system, also generally paid by the giver. For 2026 an individual can give up to $19,000 to any one person without filing a gift tax return, and lifetime gifts count against the same $15,000,000 exclusion⁶.

A separate, lower-dollar risk is state estate tax. Twelve states plus the District of Columbia charge their own estate tax, most with exemptions far below $15,000,000 and not indexed for inflation¹¹. Oregon's is the lowest: a return is required once estate assets reach $1,000,000, and the bill falls on the estate, not the heir¹⁴. An ordinary house plus savings can clear that threshold, so where the person who died lived still matters.

Which states tax the person who inherits?

Five states charge an inheritance tax directly to the heir, separate from any federal rule: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania¹¹. Whether you owe it depends on the deceased person's state of residence, not yours, and how closely related you were. A surviving spouse is exempt in all five.

Maryland is the only state that charges both an inheritance tax and a separate estate tax¹¹. Twelve other states plus DC charge an estate tax instead, which comes out of the estate before you receive anything¹¹. Iowa repealed its inheritance tax for deaths on or after January 1, 2025¹³. Confirm current numbers on the state's revenue site; Kentucky's Department of Revenue still lists nieces and nephews in the 4% to 16% Class B bracket, not the tax-free Class A group, despite online claims this changed for 2026¹⁵. See our inheritance tax by state guide for the full picture.

Do you owe tax on an inheritance from overseas?

Receiving money or property from a relative who died outside the United States is not itself taxed by the IRS. But if the total from a nonresident alien or foreign estate exceeds $100,000 in a year, you must report it on Form 3520, identifying each gift over $5,000 separately⁸. This is an information return, not a tax bill, but penalties for skipping it can be significant, and a lower threshold applies to gifts from a foreign business.

Checklist: figuring out what you owe

1. Confirm what you inherited: cash, a house, an investment account, a retirement account, a savings bond, or a mix.
2. Get the fair market value of real estate or investments at the date of death; this becomes your stepped-up basis.
3. Check whether a retirement account is traditional or Roth, and who the original owner was.
4. For a savings bond, ask the personal representative whether they reported accrued interest on the final return.
5. Find where the person who died was legally domiciled, and whether that state has an estate or inheritance tax.
6. If Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania, check your relationship class on its revenue site.
7. Keep the date-of-death appraisal with your tax records before selling inherited property.
8. Note the 10-year deadline, or annual RMD requirement, for any retirement account⁷.
9. Talk to a tax preparer about Form 3520 if a foreign gift exceeds $100,000.
10. Ask the executor for any estate tax return filed; our executor checklist guide covers what that involves.

What should you record in a family guide?

These details are hard to reconstruct after a death and easy to record in advance. A family guide, like the one Omliva helps a family put together, is a natural place to keep:

• The state where each account or property is legally based, and the owner's state of residence.
• Whether retirement accounts are traditional or Roth, and roughly when required distributions started, if any.
• Purchase price and date for real estate and major investments, with a recent value estimate, as a starting point for a future stepped-up basis.
• Whether any savings bonds are on hand, and whether their interest has been reported.
• The name and contact information of any accountant or estate attorney the person works with.
• Notes on any foreign accounts, property or relatives, which can trigger separate reporting rules.

Keeping this in one place saves the executor and heirs from tracking down decades-old records under time pressure. See our inheriting money and taxes guide for more, and our how to file taxes for a deceased person guide for the final-return side.

What mistakes do people commonly make?

• Assuming no tax return is ever needed. A large foreign inheritance, a retirement withdrawal, a cashed-in savings bond or a property sale can still require a filing.
• Confusing estate tax with inheritance tax. Only five states tax the heir directly; other "estate tax states" bill the estate at a threshold that can be far lower than the federal one.
• Missing the inherited IRA's 10-year deadline, or skipping a required annual distribution, which can trigger a 25% excise tax on the missed amount⁷.
• Losing the date-of-death valuation, needed to prove the stepped-up basis at sale; without it, an audit may assume a bigger gain.
• Assuming your own state's rules apply. Inheritance tax is based on the deceased person's state of residence, not yours.
• Trusting unsourced "the law changed this year" claims. Several sites claim Kentucky exempted nieces and nephews in 2026; the state's own revenue page shows no such change.

When to get professional help

A straightforward inheritance, cash, a modest house, a standard IRA, does not require a lawyer or accountant. Bring in a CPA to plan a retirement withdrawal, document basis before a sale, report a savings bond's interest, or when the estate nears an estate tax threshold. Bring in an estate attorney if your relationship class in an inheritance-tax state is unclear, you are weighing a disclaimer, or a trust, business or multi-state property is involved.