Written by 
Edited by 
Edited by 
Reviewed by 
When someone receives assets from an estate, taxes may or may not apply depending on several factors, including the type of asset, the total value of the estate and state-level inheritance tax laws. In general, beneficiaries do not pay income tax on inherited cash or property, but they may owe taxes on certain types of distributions, such as from traditional IRAs or retirement accounts. Estate taxes, if due, are typically paid by the estate before distributions are made. Some states also impose inheritance taxes that apply directly to the recipient.
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 IRA distributions 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 federal estate tax began with the Revenue Act of 1916, which taxed wealth transferred at death alongside the new income tax.
Exemption levels and tax rates changed periodically during the 20th century. Under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, the top rate fell from 55% to 45% by 2009, and the estate tax was fully repealed for 2010, though the gift tax remained in place.
In December 2010, Congress retroactively reinstated the estate tax for 2010, while letting estates of people who died that year choose a different set of rules instead. A temporary structure followed in 2011 and 2012, with a 35% top rate and a $5 million exemption. In 2013, Congress made the estate tax permanent with a 40% top rate and an exemption indexed for inflation.
The Tax Cuts and Jobs Act of 2017 roughly doubled the exemption for 2018 through 2025. It started at about $11.2 million per person and rose to $13.99 million in 2025, with married couples able to shelter about twice that amount, while the 40% rate stayed the same.
The One Big Beautiful Bill Act, signed July 4, 2025, made the higher exemption permanent. It set the exemption at $15 million per person, or $30 million for married couples, starting January 1, 2026, with annual inflation adjustments after that. The top estate tax rate remains 40%.
When an Inheritance Becomes Taxable Income
The tax treatment of an estate distribution often depends on whether a beneficiary is receiving inherited principal or income connected with the inherited assets. Cash or property inherited from a decedent generally is not federal taxable income simply because the beneficiary receives it, though income associated with that property can be different.
For example, a beneficiary who inherits stock worth $200,000 on the decedent’s date of death generally takes that $200,000 as their tax basis under the rules for inherited property. If the beneficiary later sells the stock for $215,000, the potential taxable capital gain would generally be $15,000 ($215,000 − $200,000).
Other inherited assets may carry taxable income with them. A taxable distribution from an inherited traditional IRA is generally included in the beneficiary’s gross income, subject to any basis in the account. Income the decedent was entitled to but hadn’t received before death, known as income in respect of a decedent, can also be taxable when the estate or beneficiary later collects it.
A Roth IRA left to you works differently. The money the original owner put in comes out free of federal tax, and the account’s growth is usually tax-free as well once the five-year holding period that began with the owner’s first contribution has passed. If that period hasn’t been met, the earnings portion of a payout may be taxed. Most heirs also face a deadline, often 10 years, to empty the account, depending on their relationship to the owner and other factors.
For beneficiaries, identifying what an estate distribution represents can be as important as knowing its dollar amount. Inherited principal, estate income and retirement assets can produce different federal tax results even when each payment comes from the same estate.
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.
Photo credit: ©iStock.com/DragonImages, ©iStock.com/SDI Productions, ©iStock.com/kate_sept2004