Is Your Inheritance Taxable?

Whether an inheritance is taxable depends on where you live, your relationship to the deceased and the value of the property you inherit. The federal government does not levy an inheritance tax, but a few states do. Beneficiaries typically don’t owe income tax on cash or property they receive, though some inherited assets like traditional IRAs or 401(k)s can generate income taxes when withdrawn. Estate taxes, on the other hand, are paid by the deceased’s estate before any assets are distributed to heirs.

A financial advisor can also help you create an estate plan for you and your family. Speak with an advisor today.

Is Your Inheritance Taxable?

An inheritance may be taxable depending on a few factors. Your inheritance can actually be taxed in two ways: inheritance taxes and estate taxes. However, you’re only potentially responsible for paying inheritance tax. Estate tax comes directly out of an estate before it’s divided and distributed.

Whether you’ll actually have to pay an inheritance tax depends on which state the deceased lived in, as there is no federal inheritance tax. Only five states impose an inheritance tax in 2026: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Iowa previously levied an inheritance tax but gradually phased it out over several years, before fully repealing it Jan. 1, 2025.

Even if you live in one of these states but the deceased did not, you won’t have to pay inheritance tax. State laws are subject to change though, so always double-check with your state tax agency.

A third way you may end up paying for your inheritance is through state and federal income taxes. Inheritance isn’t typically considered income, but certain types of assets you inherit may have tax implications. You may have to pay taxes when you take the distributions from an inherited retirement account or when you sell inherited real estate or stocks.

Inheritance Tax vs. Estate Tax

You may hear the terms used interchangeably, but inheritance tax and estate tax are two distinct taxes. The most obvious difference between the two is who pays the tax. Estate tax is taken out of the deceased’s assets before they’re doled out to beneficiaries. With inheritance tax, the tax is levied after the inheritance is distributed to beneficiaries.

While inheritance tax is only levied by certain states, both the federal government and individual states may collect an estate tax. However, the federal estate tax in 2025 only applied to estates that were worth more than $13.99 million or $27.98 million for married couples. In 2026, those limits rose to $15 million and $30 million, respectively, under the One Big Beautiful Bill Act. Twelve states, plus the District of Columbia, levy their own estate taxes. Washington and Hawaii have two of the highest top estate tax rates in the country, though Washington’s rate recently changed: it was 35% for deaths before June 30, 2026, and dropped to 20% for deaths on or after July 1, 2026, now roughly matching Hawaii’s top rate.

Notably, Maryland is the only state that currently collects both estate and inheritance taxes. In Maryland, assets can be taxed both before and after distribution. In other states, assets will only be taxed before or after distribution, or at either time.

How Does Inheritance Tax Work?

Inheritance tax only applies if the deceased lived in one of the five states that levy inheritance tax. Even if you live in an inheritance tax state you won’t pay any tax if the deceased lived in a state that did not have one.

You won’t have to pay inheritance tax until after the decedent’s estate goes to the correct beneficiaries. Unlike estate tax, which is collected from the deceased’s assets before they’re distributed to beneficiaries, inheritance tax is levied after distribution. The beneficiaries are responsible for paying inheritance tax.

Each beneficiary may owe a different amount. The amount that a beneficiary owes depends on how much he or she has received, what his or her relationship to the deceased is and in which state the deceased lived.

Inheritance Tax Exemptions

State inheritance tax rates are dependent on the beneficiary’s relationship to the deceased. In all five states, a surviving spouse is exempt from paying inheritance tax. New Jersey and Maryland are the only states that have a complete exemption for domestic partners. Kids and grandkids are exempt from inheritance tax in each of the states except for Pennsylvania and Nebraska.

Exemption rates vary state by state for siblings, nieces and nephews, aunts and uncles and son- and daughter-in-law. Generally, beneficiaries who don’t have a familial relation to the deceased will pay higher inheritance tax rates.

There are also monetary exemptions. For instance, Kentucky does not levy an inheritance tax on surviving spouses, children, parents and other closely-related kin. While extended family members like aunts, uncles, nieces and nephews are subject to the state’s inheritance tax, up to the first $1,000 that they receive is exempt.

How Much Is the Inheritance Tax?

Inheritance tax rates vary widely. As previously mentioned, the amount you owe depends on your relationship with the deceased. Inheritance tax rates range from 0% up to 18% of the value of the inheritance.

For 2026, here are the ranges for each of the five states that collect inheritance tax:

• Kentucky: 4% – 16% ¹
• Maryland: 10% ²
• Nebraska: 1% – 15% ³
• New Jersey: 11% – 16% ⁴
• Pennsylvania: 4.5% – 15% ⁵

What to Do When You Receive an Inheritance

The decisions made in the first few months after receiving an inheritance tend to have the longest lasting consequences, and the most common mistake is moving too quickly. A sudden influx of cash or assets creates pressure to do something with it, but most financial missteps with inheritances come from acting before having a clear picture of what was actually received and what comes with it.

Start by taking a full inventory. Cash, investment accounts and retirement accounts are straightforward to identify. Real estate, business interests, personal property and collectibles require more work to value accurately. If the estate is still being administered, some assets may not transfer immediately, and the final amounts may differ from initial estimates. Knowing exactly what you have before making any decisions is more useful than acting on an approximate figure.

Different assets require different professionals. A tax professional can help you understand the income tax implications of inherited retirement accounts and the capital gains exposure on appreciated assets you plan to sell. An estate attorney can clarify any conditions attached to the inheritance or resolve disputes about distribution. A financial advisor can help you integrate what you received into your existing financial plan rather than treating it as a separate pool of money to manage in isolation. In many cases you need all three, and the order in which you engage them matters.

Paying down high-interest debt, shoring up an emergency fund and catching up on retirement contributions are often the highest-return uses of an inheritance before any investment decisions are made. The impulse to invest immediately is understandable, but addressing financial vulnerabilities first tends to produce more durable outcomes than chasing returns with money that could have eliminated a costly liability.

How Inherited Assets Affect Your Tax Situation Going Forward

An inheritance that arrives free of tax at the moment of transfer can create ongoing tax obligations depending on what the assets are and what you do with them. Understanding those obligations before they surface on a tax return is considerably less stressful than discovering them after the fact.

Inherited traditional IRAs and 401(k)s are among the most tax-consequential assets a non-spouse beneficiary can receive. Under current rules, most non-spouse beneficiaries must fully distribute an inherited retirement account within ten years. Every dollar distributed is added to your ordinary income for that year. A large inherited IRA distributed in a single year can push a beneficiary into a significantly higher bracket. Spreading distributions across the ten-year window, particularly in years when your other income is lower, reduces that exposure meaningfully.

Inherited stocks, funds and other investment accounts receive a stepped-up basis at the date of the original owner’s death, which eliminates the capital gains that accumulated during the deceased’s lifetime. Once you own the assets, any further appreciation is measured from that stepped-up value. If you sell shortly after inheriting, the gain is typically small. If you hold for years and the assets appreciate substantially, you’ll owe capital gains tax on that growth when you eventually sell, at either short-term or long-term rates depending on how long you held them after the transfer. You’ll also owe income tax along the way on any income the investments generate, such as interest and dividends.

Inherited real estate that you hold and rent generates rental income that must be reported each year. If you sell, the gain is measured from the stepped-up basis rather than what the original owner paid, which can reduce the taxable gain significantly on property that appreciated over decades. Inherited real estate that you move into as a primary residence has its own set of considerations around the eventual sale exclusion and how long you need to occupy the property to qualify.

The tax picture for any inherited estate is rarely simple, and the combination of assets involved makes it worth reviewing with a tax professional in the year you receive the inheritance rather than waiting until filing season.

How Can I Protect My Inheritance From Taxes?

The most obvious, and perhaps the most logistically difficult, is to try to get your benefactor to move to a state that doesn’t have an inheritance tax. Moving aside, benefactors have the option of putting the assets into a trust. Instead of waiting until after they’ve died to dole out your inheritance, they could consider gifting a portion of the assets each year.

Setting up certain trusts protects your inheritance from taxation. There are also other tax management strategies you can use when managing your estate or inheritance, working with an account or financial advisor could be helpful.

Frequently Asked Questions About Taxable Inherited Assets

Bottom Line

Keep in mind that estate tax and inheritance tax are not the same. A beneficiary pays inheritance tax after receiving his or her portion of the assets. In 2026, only five states (Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) have an inheritance tax. Only Maryland levies both estate and inheritance tax. Inheritance tax rates vary depending on your relationship with the deceased. As with anything involving taxes, always be sure to double-check state tax laws before doing anything, as these laws are subject to change.

Tips for Managing an Inheritance

• A financial advisor could help you create an estate plan for your family. Finding a financial advisor doesn’t need 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.
• Assess your current situation before making any moves. Look for the area where you need the most help. Owe a lot of debt? Consider using your inheritance to pay that off. Behind on retirement savings? Think about adding the funds to your retirement savings account.

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