Estate tax vs inheritance tax: two different taxes
Almost every "is inheritance taxable" worry comes from mixing up two taxes with similar names. An estate tax is charged on the deceased person's total estate before anything is handed out; the executor pays it from estate assets, and heirs receive what is left. An inheritance tax is charged on the recipient, after distribution, and the rate depends on how closely related you were to the person who died.
The federal government levies only the first kind. There is no federal inheritance tax at all, and there never has been in the modern tax code. Inheritance taxes exist only at the state level, and only in five states.
| Estate tax | Inheritance tax | |
|---|---|---|
| Who pays | The estate, before distribution | The beneficiary who receives |
| Level of government | Federal, plus 12 states and DC | State only: KY, MD, NE, NJ, PA |
| When it applies | Estate value exceeds the exemption (federal: $15 million in 2026) | You inherit from a resident of (or property in) one of the five states |
| What sets the rate | Size of the estate | Your relationship to the deceased |
| Effect on a typical heir | None: paid before you receive anything | None in 45 states; spouses exempt everywhere |
One more distinction worth locking in: neither tax is an income tax. Even in the rare cases where estate or inheritance tax applies, the inheritance itself still does not go on anyone's federal income tax return. The income tax only enters the picture for specific assets, covered in the asset-by-asset section below.
The federal estate tax barely touches anyone
In 2026 the federal estate tax exemption is $15,000,000 per person, an amount the One Big Beautiful Bill Act made permanent and indexed for inflation starting in 2027. With portability, a surviving spouse can use a deceased spouse's unused exemption, so a married couple can shield $30,000,000. Only the value above the exemption is taxed, at rates that top out at 40%.
The practical result: the federal estate tax is a non-event for nearly every family. The Tax Policy Center and IRS filing data put the share of deaths that produce any federal estate tax liability at fewer than 0.1%, roughly one or two estates per thousand deaths. Unless the person who died had a net worth well into eight figures, no federal estate tax was owed, and nothing about it lands on you as the heir.
Even for estates that do owe it, the tax is settled by the executor before distributions. Beneficiaries of a taxable estate receive their shares after the tax, they do not get a bill.
Transfers between spouses deserve their own line: the unlimited marital deduction means a U.S.-citizen spouse can inherit any amount, from any size estate, with zero federal estate tax.
The five states with an inheritance tax
As of 2026, exactly five states levy an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa used to be the sixth; its inheritance tax was phased down and fully repealed for deaths on or after January 1, 2025. Maryland is the only state in the country with both an inheritance tax and its own estate tax.
What matters is where the deceased lived (or where their real property sits), not where you live. If your aunt in Florida leaves you money, no inheritance tax applies even if you live in Pennsylvania. If a Pennsylvania resident leaves you money, Pennsylvania inheritance tax can apply even if you live in Texas.
Every one of the five states fully exempts surviving spouses, and most exempt children and other close family. Rates climb as the relationship gets more distant:
| State | Fully exempt | Typical rates for others |
|---|---|---|
| Kentucky | Spouse, children, grandchildren, parents, siblings | 4% to 16% for nieces, nephews, and more distant heirs |
| Maryland | Spouse, children and other lineal relatives, parents, grandparents, siblings | Flat 10% for everyone else |
| Nebraska | Spouse and charities | 1% above a $100,000 exemption for close relatives; 11% for remote relatives; 15% for non-relatives |
| New Jersey | Spouse, children, grandchildren, parents | 11% to 16% for siblings; 15% to 16% for unrelated heirs |
| Pennsylvania | Spouse (and parents inheriting from a child 21 or younger) | 4.5% for children and other lineal heirs; 12% for siblings; 15% for others |
Pennsylvania is the notable outlier: it is the only one of the five that taxes transfers to adult children (at 4.5%). In the other four, a typical parent-to-child inheritance passes with no inheritance tax at all.
State estate taxes: lower thresholds than the federal one
Separate from inheritance taxes, 12 states plus Washington, DC levy their own estate tax in 2026: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and DC. Like the federal version, these are paid by the estate before distribution, so heirs do not get the bill, but the thresholds are dramatically lower than the federal $15 million.
- Oregon has the lowest exemption in the country at $1 million, with rates from 10% to 16%. Ordinary homeowners with retirement savings can cross it.
- Massachusetts exempts $2 million, and its "cliff" design means an estate over the line is taxed from a much lower starting point, not just on the excess.
- At the other end, Connecticut matches the federal exemption at $15 million, and New York exempts roughly $7.35 million (with its own cliff: estates a bit more than 5% over the threshold lose the exemption entirely).
If the person who died lived in one of these states (or owned real estate there), the executor handles the state estate tax return. As a beneficiary, the only effect you see is a somewhat smaller estate to distribute.
What beneficiaries actually owe, asset by asset
Here is the table that answers the real question. Receiving the asset is almost never taxable; what matters is the tax character the asset carries with it.
| Asset you inherit | Tax when you receive it | Tax later |
|---|---|---|
| Cash or bank accounts | None | None (only future interest it earns is taxable, as usual) |
| Home, land, stocks, funds in a taxable account | None | Capital gains only on growth above the stepped-up (date-of-death) value when you sell |
| Traditional IRA or 401(k) | None at transfer | Every withdrawal is ordinary income; most non-spouse heirs must empty the account within 10 years |
| Roth IRA or Roth 401(k) | None | Withdrawals tax-free (if the account was 5+ years old), but the same 10-year emptying clock applies |
| Life insurance death benefit | None (income-tax-free) | Only interest earned on a delayed payout is taxable |
| Annuity (non-qualified) | None at transfer | The gain above what the deceased paid in is ordinary income as you withdraw; no step-up |
| Savings bonds, final paychecks, unpaid RSUs | None at transfer | Taxable to you as income when paid: this is "income in respect of a decedent" |
Life insurance deserves one clarification: the death benefit is income-tax-free to the beneficiary in essentially all normal cases, and the exceptions (installment interest, estate inclusion, transferred policies) are narrow. We cover every one of them in Is life insurance taxable?.
Annuities and retirement accounts are the flip side. They never got a step-up because the money inside was never taxed, so the deferred gain comes out as ordinary income to whoever withdraws it. That makes an inherited $500,000 traditional IRA genuinely worth less after tax than an inherited $500,000 brokerage account, a difference worth knowing before you compare bequests.
Stepped-up basis: the quiet tax break in every inheritance
When you inherit property or investments, your cost basis "steps up" to the asset's fair market value on the date of death. All the appreciation during the deceased's lifetime is simply never taxed as capital gains, to anyone. This rule (Section 1014 of the tax code) survived the 2025 tax law unchanged; the One Big Beautiful Bill Act raised the estate exemption and left step-up fully intact.
The numbers make it vivid. Say your mother bought a house for $100,000, it was worth $500,000 when she died, and you sell it a few months later for $520,000:
| If she had gifted it while alive | Inherited (stepped-up basis) | |
|---|---|---|
| Your cost basis | $100,000 (her original cost carries over) | $500,000 (value at death) |
| Sale price | $520,000 | $520,000 |
| Taxable capital gain | $420,000 | $20,000 |
The step-up erases $400,000 of gain from ever being taxed. Only the $20,000 of appreciation after death is a taxable long-term capital gain (inherited property is automatically treated as long-term, no matter how quickly you sell). Sell at or below the date-of-death value and you owe nothing, and can even claim a loss.
Two practical notes. Inherited stocks and funds in a regular brokerage account work exactly the same way, share by share. And the same logic explains a classic planning mistake: gifting appreciated property during life hands the recipient the old low basis, while leaving it as an inheritance wipes the gain out.
Inherited IRAs and 401(k)s: where the real tax bill lives
This is the one inheritance most families actually pay tax on. A traditional IRA or 401(k) is pre-tax money, and inheriting it means inheriting the deferred tax bill: every dollar you withdraw is ordinary income in the year you take it, stacked on top of your salary.
Since the SECURE Act, most non-spouse beneficiaries (adult children above all) fall under the 10-year rule: the inherited account must be completely emptied by December 31 of the tenth year after death. And under IRS final regulations issued in 2024 and effective starting in 2025, there is a second layer: if the original owner had already reached their own required-distribution age, you must also take annual RMDs in years one through nine, not just drain it in year ten. Miss one and the penalty is up to 25% of the amount you should have taken. If the owner died before their RMD age, you can time withdrawals freely within the 10 years.
The planning consequence is bracket management. Spreading a $500,000 inherited IRA evenly over 10 years adds $50,000 a year to your income; taking it in one year could push much of it into the top brackets. Model where extra withdrawal income lands with our federal income tax calculator, and use the retirement withdrawal calculator to sequence the drawdown alongside your own savings.
- Surviving spouses have better options. A spouse can roll the account into their own IRA and treat it as theirs (no 10-year clock, RMDs on their own schedule), or stay a beneficiary and stretch distributions over their life expectancy.
- Eligible designated beneficiaries (minor children of the deceased until adulthood, disabled or chronically ill heirs, and beneficiaries less than 10 years younger than the deceased) can also stretch over life expectancy instead of 10 years.
- Inherited Roth IRAs are the pleasant version: withdrawals are tax-free as long as the account was at least five years old, but the same 10-year emptying rule applies to most non-spouse heirs. The smart move is often to leave it growing tax-free until year ten.
Income in respect of a decedent: the income that follows you
One honest wrinkle in the "inheritance is not income" rule. Money the deceased had earned but not yet received keeps its character as taxable income and is taxed to whoever collects it: a final paycheck, unpaid bonuses or commissions, RSUs that vested but had not paid out, accrued interest on savings bonds, unpaid rent, and (the biggest example by far) balances in traditional retirement accounts. The tax code calls this "income in respect of a decedent," or IRD. These items never get a stepped-up basis, because step-up only applies to appreciated property, not to income the deceased simply had not been taxed on yet. If the estate was large enough to owe federal estate tax, the recipient can claim an itemized deduction for the estate tax attributable to the IRD, though at a $15 million exemption that offset is rarely relevant anymore.
Practical moves for inheritors (and for those leaving one)
If you are the one inheriting:
- Do not rush distributions. Nothing bad happens by leaving assets where they are for a few weeks while you learn the rules. The costly mistakes (cashing out an IRA, selling before understanding basis) are all one-way doors.
- Mind the inherited-IRA titling trap. A non-spouse beneficiary must move the money by direct trustee-to-trustee transfer into a properly titled inherited IRA. If the custodian cuts you a check instead, that is a full taxable distribution with no way to undo it: non-spouses get no 60-day rollover.
- Document date-of-death values now. Get a home appraisal and record brokerage values as of the date of death. That paperwork is your stepped-up basis, and reconstructing it years later is painful. Check where a future sale's gain would land with our tax bracket calculator.
- Get a professional when layers stack up: an estate over a state threshold, an inheritance-tax state, a trust as beneficiary, or a large inherited IRA all justify an hour with a CPA before you touch anything.
If you are planning what you will leave:
- Beneficiary designations beat wills. IRAs, 401(k)s, and life insurance pass by the named beneficiary regardless of what the will says. Review them after every marriage, divorce, or birth.
- Lifetime gifting is nearly friction-free. In 2026 you can give $19,000 per recipient per year ($38,000 for a married couple) with no tax and no forms, and even gifts above that just draw down the $15,000,000 lifetime exemption. But remember the step-up lesson: give cash freely, and think twice before gifting highly appreciated assets.
- Trusts are for control, privacy, and state-tax planning more than federal-tax savings at today's exemption; if your estate approaches eight figures or an Oregon-style state threshold, that is the conversation to have with an estate attorney.