Do Beneficiaries Pay Taxes on Estate Distributions?

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 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 create an estate plan to mitigate your family’s tax liability on their inheritance.

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 2025, an estate can be worth up to $13.99 million before a federal estate tax is required. In 2026, that threshold rises to $15 million. 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 2022, 11 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, Washington, Vermont	Kentucky, Pennsylvania, Nebraska, New Jersey	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 IRAs 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

Estate taxation began with the Revenue Act of 1916, instituted to tax wealth transfers at death alongside the new income tax.

During the 20th century, exemption levels and tax rates changed periodically. Under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, the top rate dropped from 55% to 45% by 2009, and the estate tax was fully repealed for 2010, though gift tax remained active.

In December 2010, Congress retroactively reinstated the tax for 2010 estates. A temporary structure followed in 2011–2012 with a 35% rate and $5 million exemption. In 2013, the estate tax was made permanent with a 40% rate and inflation‑indexed exemption.

The Tax Cuts and Jobs Act (2017) doubled the exemption for 2018 through 2025—initially around $11.2 million, rising to about $13.99 million in 2025—for individuals, and roughly double for couples, with the 40% rate intact.

The One Big Beautiful Bill Act was signed July 4, 2025. It makes the TCJA‑enhanced exemption permanent, raising it to $15 million per person ($30 million per married couple) starting Jan. 1, 2026, and indexed annually thereafter. The current exemption for 2025 remains the prior level (~$13.99M), and the top rate stays at 40%

Bottom Line

Tax outcomes from estate distributions can differ widely based on asset type, timing, and location. While federal estate taxes affect only the largest estates, some beneficiaries may still encounter tax obligations tied to retirement accounts or state-level laws. Inherited income-producing assets can also create reporting requirements during the estate’s administration. Knowing which rules apply often depends on the interplay between federal thresholds, state statutes and the nature of the inheritance 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.