Estate tax vs. state inheritance tax
| Tax | Who pays it | Who it applies to |
|---|---|---|
| Federal estate tax | The estate, before distribution | Only estates above $15 million per person for 2026 ($13.99 million for 2025), or double that for married couples using portability |
| State inheritance tax | The person receiving the assets | Only in a handful of states, with many exemptions |
Source: Internal Revenue Service
Note: Spouses and often children are typically exempt from state inheritance tax.
What happens after you receive an inheritance
The inheritance itself isn’t income. But once you receive it, any interest, dividends, or other earnings it generates going forward are taxable, just like income from any other source.
Selling inherited property
Inherited assets get a stepped-up basis, meaning their cost basis resets to fair market value on the date of death. You only owe capital gains tax on appreciation that happens after you inherit the asset, and the sale is automatically treated as a long-term capital gain or loss.
Inherited retirement accounts
Withdrawals from an inherited traditional IRA or 401(k) are taxed as ordinary income when you take them. Most non-spouse beneficiaries must empty the account within 10 years, so understanding your distribution timeline matters for tax planning.
When you might still owe something
You could owe state inheritance tax if the deceased lived in one of the handful of states that impose it. You might also need to file Form 3520 to disclose a large inheritance from a foreign person or estate, even though it isn’t taxed as income.
