How Much Can You Inherit Without Paying Taxes? Federal & State Rules

The federal government does not tax inheritances received by beneficiaries. Instead, the IRS assesses estate tax on the deceased person's estate if its total value exceeds $13.61 million in 2024 (or $27.22 million for married couples using portability).

If the estate's value falls below the exemption threshold, no federal estate tax return (Form 706) is required, and beneficiaries receive the full amount with no federal tax liability. Estates exceeding the threshold pay tax only on the amount above $13.61 million, at rates ranging from 18% to 40%.

State-by-state breakdown:

• Iowa: Phasing out—inheritance tax eliminated for deaths after January 1, 2025.
• Kentucky: Immediate family (spouse, parents, children, siblings, half-siblings) fully exempt.
• Maryland: Inherits both estate and inheritance tax.
• Nebraska: Immediate family pays 1% on amounts over $40,000; remote relatives pay up to 13% with a $15,000 exemption; unrelated heirs pay 18% with $10,000 exempt.
• New Jersey: Eliminated inheritance tax for most heirs as of January 1, 2018, but still applies to transfers to siblings (11-16% over $25,000) and more distant relatives or friends (15-16% over $500).

You must file an inheritance tax return in the state where the deceased resided, typically within 8-12 months of death. The executor or administrator usually withholds the tax before distribution, but beneficiaries remain legally responsible.

However, inherited retirement accounts—traditional IRAs, 401(k)s, 403(b)s—carry income tax obligations. The SECURE Act of 2019 requires most non-spouse beneficiaries to withdraw the entire balance within 10 years of the account holder's death, paying ordinary income tax on each distribution.

Ongoing income from inherited assets is taxable. If you inherit a rental property generating $2,000 monthly rent or dividend-paying stocks, you owe income tax on those earnings from the date you become the owner.

The step-up in basis resets the tax cost of inherited property to its fair market value on the date of death, eliminating capital gains tax on appreciation during the deceased's lifetime. This rule applies to most capital assets: real estate, stocks, bonds, mutual funds, business interests, collectibles, and tangible personal property.

Example: Your mother purchased stock in 1990 for $20,000. At her death in 2024, the shares are worth $200,000.

Assets that do not receive a step-up include retirement accounts (IRAs, 401(k)s), annuities, and assets held in certain trusts where the deceased did not own the property at death (such as irrevocable trusts where the grantor gave up control). Income in respect of a decedent (IRD)—income the deceased earned but did not receive before death, like unpaid wages or bond interest—remains taxable to heirs at ordinary income rates.

Estate tax is assessed on the total value of a deceased person's assets before distribution, paid by the estate to the government, and based on the size of the estate. Inheritance tax is levied on beneficiaries after they receive assets, varies by the heir's relationship to the deceased, and is paid by the recipient.

An estate valued at $10 million in Pennsylvania, for example, owes no federal or Pennsylvania estate tax, but beneficiaries who are not direct descendants pay Pennsylvania inheritance tax on their shares. Conversely, a $15 million estate in Florida pays federal estate tax on roughly $1.4 million (the amount over $13.61 million) but no state estate or inheritance tax because Florida imposes neither.

State rules create significant variation in tax-free inheritance amounts beyond federal exemptions.

Estate tax only: Connecticut ($13.61 million exempt), Hawaii ($5.49 million), Illinois ($4 million), Maine ($6.41 million), Massachusetts ($2 million), Minnesota ($3 million), New York ($6.94 million), Oregon ($1 million), Rhode Island ($1.73 million), Vermont ($5 million), Washington ($2.193 million), Washington, D.C. ($4 million). If the estate falls below the threshold, beneficiaries inherit tax-free regardless of relationship or amount.

Inheritance tax states: Apply exemptions and rates as detailed in the second section. A Pennsylvania resident leaving $5 million to a child pays zero inheritance tax (direct descendants exempt), while the same $5 million to a niece triggers 15% tax on the entire amount—$750,000.

Life insurance death benefits paid to a named beneficiary are income-tax-free, regardless of amount. A $2 million policy pays out $2 million with no federal or state income tax to the recipient.

Interest earned on life insurance proceeds after the date of death is taxable income. If the insurer holds the payout and pays interest over time, you owe income tax on the interest portion.

Inherited Roth IRAs allow tax-free withdrawals if the original account was funded at least five years before the first distribution, but non-spouse heirs still face the 10-year distribution requirement. Strategic timing of withdrawals across the decade can minimize the beneficiary's total tax burden by avoiding brackets and surcharges in high-income years.

Inherited annuities face similar rules: deferred annuities carry income tax on gains when distributions begin, and non-spouse beneficiaries typically must take the full payout within five years or begin life-expectancy distributions within one year of death.

For inherited retirement accounts, calculate the annual distribution required to empty the account within 10 years and model tax scenarios. Taking larger distributions in low-income years and smaller amounts when you have high W-2 income can save thousands in taxes.

Document the date-of-death value of all inherited property immediately. Obtain professional appraisals for real estate, businesses, and collectibles to establish your step-up basis for future sales.

Finally, avoid making major financial decisions immediately after inheriting. The emotional period following a death often leads to overspending, hasty investment choices, or pressure from family members.