In the U.S., you can inherit any amount of money without paying federal income tax, though very large estates may owe estate tax before inheritance is received.
When a person dies, everything they own—cash, real estate, investments, business holdings, and personal possessions—together forms their estate. The legal transfer of these assets to heirs or beneficiaries is known as inheritance. This transfer can happen through a will, a trust, or, if no estate plan exists, under state intestacy laws that determine who receives what.
While inheritance may sound straightforward, the tax rules surrounding it can be complex. In the United States, there is no single, uniform “inheritance tax” at the federal level. Instead, whether taxes apply depends on several factors, including:
- The state where the deceased lived
- The state where the heir lives
- The total value of the estate
- The heir’s relationship to the deceased
- The type of assets being passed on
The good news is that, under current federal law, most people do not pay income tax simply for receiving an inheritance. Money or property received from an estate is generally not treated as taxable income by the IRS. However, certain states impose their own estate taxes, inheritance taxes, or both, each with different exemption thresholds and tax rates.
As a result, two individuals inheriting the same amount of wealth could face very different tax consequences based solely on geography and family relationship. Understanding today’s inheritance and tax framework is essential for knowing whether any taxes might apply and how much of an inherited estate you may ultimately keep.
Key Tax Types and How They Apply
Federal Income Tax on Inheritances
Under current U.S. tax law, you do not owe federal income tax simply because you receive an inheritance. Inherited cash, property, or investments are not treated as taxable income at the time they pass to you.
However, taxes can apply to income generated by those assets after you inherit them. This may include:
- Interest or dividends from inherited stocks, bonds, or savings accounts
- Rental income from inherited real estate
- Required distributions from inherited retirement accounts such as IRAs or 401(k) plans
Most inherited property also receives a “step-up in basis,” meaning its tax value is reset to its market price at the time of the owner’s death. This typically reduces or eliminates capital gains tax on appreciation that occurred during the original owner’s lifetime. You are generally taxed only on gains that occur after you inherit the asset.
Bottom line: Receiving an inheritance is not taxable income, but any income the assets produce afterward may be.
Federal Estate Tax
The federal estate tax is not paid by heirs. It is assessed on the estate itself before assets are distributed.
Only very large estates are subject to this tax. For 2025, the federal estate tax exemption is approximately $13.99 million per individual. For married couples, portability rules allow the unused portion of a spouse’s exemption to be transferred, effectively shielding nearly $28 million from federal estate tax.
As a result, well over 99% of estates in the United States owe no federal estate tax at all.
State Inheritance Tax
A small number of states impose an inheritance tax, which is paid by the person receiving the assets, not by the estate.
As of 2025, the states with some form of inheritance tax include:
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
(Iowa has completed the phase-out of its inheritance tax and no longer imposes it.)
Inheritance tax rates typically depend on the beneficiary’s relationship to the deceased. Spouses are usually fully exempt. Children and grandchildren often receive large exemptions or reduced rates, while more distant relatives or unrelated beneficiaries may face higher percentages, sometimes reaching into the low-to-mid teens.
State Estate Tax
Separate from the federal system, several states levy their own estate taxes on the total value of an estate before distribution. These state thresholds are often much lower than the federal exemption, which means estates that owe no federal tax may still owe state estate tax.
Examples of 2025 state estate tax exemptions include:
- Oregon: $1 million
- Massachusetts: $2 million
- New York: about $7.16 million
- Washington: about $2.19 million
If an estate exceeds a state’s exemption level, state estate tax may apply even though the estate is far below the federal threshold.
How Much Can You Inherit Without Paying Taxes?
At the Federal Level
In the United States, there is still no federal inheritance tax. This means beneficiaries are not taxed simply for receiving money, property, or other assets from an estate.
The only federal tax that may apply is the estate tax, which is paid by the estate itself before assets are distributed. For 2025, the federal estate tax exemption is about $13.99 million per individual. Married couples can effectively shield nearly $28 million using portability.
In practical terms, this means that unless the total estate value exceeds these thresholds, no federal estate tax is owed, and heirs receive their inheritances free of federal tax.
At the State Level
State rules are where inheritance taxes become more complicated.
How much you can inherit tax-free depends on:
- The state where the deceased lived or owned property
- Your relationship to the deceased
- The total size of the estate
Only a small number of states impose an inheritance tax, and a separate group of states levy their own estate tax with exemption levels far lower than the federal limit.
Examples of how this can vary:
- Pennsylvania: Inheritance tax ranges from 0% for spouses to as high as 15% for distant relatives and unrelated heirs.
- Nebraska: Inheritance tax rates can range roughly from 1% to 15%, with exemptions depending on family relationship.
- Maryland: Has both an estate tax and an inheritance tax, though close family members are usually exempt from the inheritance portion.
- Oregon: Imposes an estate tax on estates valued above $1 million, even though no federal tax would apply at that level.
Because of these lower state thresholds, it is possible for an estate that owes no federal tax to still face state-level taxes. In some states, heirs may begin owing inheritance tax once their share exceeds relatively modest exemption amounts, sometimes in the tens or hundreds of thousands of dollars, depending on their relationship to the deceased.
Relationship Matters
Your relationship to the person who passed away plays a major role in determining whether inheritance taxes apply and how much you might owe.
In most states that impose inheritance taxes:
- Spouses are almost always fully exempt and pay no inheritance tax.
- Children and grandchildren typically receive large exemptions and are either taxed at very low rates or not taxed at all.
- More distant relatives (such as siblings, nieces, nephews, cousins) and non-family beneficiaries usually face higher tax rates and lower exemption limits.
In practical terms, this means the closer your legal or blood relationship to the deceased, the more favorable your tax treatment tends to be. Unrelated heirs and extended family members are the most likely to encounter state inheritance taxes and the highest percentage rates.
Other Important Considerations
- Ongoing income is taxable.
While receiving an inheritance itself is usually not taxed, any income the inherited assets generate later—such as rental income, interest, dividends, or business profits—is generally taxable to the beneficiary under normal income tax rules. - Lifetime gifts can affect estate taxes.
Large gifts made before death may be included when calculating whether an estate exceeds federal or state estate tax exemptions. These transfers can reduce the remaining exemption available at death and potentially trigger estate tax liability. - Location of assets can matter.
If the deceased owned property or investments in multiple states, different state tax laws may apply to different portions of the estate. Real estate, in particular, is often subject to the tax rules of the state where it is located, which can create varying tax outcomes for heirs.
Practical Thresholds & Real-World Examples
Federal Example
If an estate is valued at $10 million in 2025, it falls below the federal estate tax exemption of $13.99 million. This means:
- No federal estate tax is owed by the estate.
- Beneficiaries receive their inheritances without any federal tax on the transfer itself.
In this scenario, heirs only face taxes later if the inherited assets produce taxable income.
State Examples
State rules can lead to very different outcomes:
- Oregon:
Estate tax applies once the estate exceeds $1 million, even though no federal tax would be due at that level. - Maryland:
Estate tax generally applies to estates above about $5 million, and an inheritance tax may also apply to beneficiaries who are not immediate family members. - Florida:
No state estate tax and no inheritance tax, making inheritances fully tax-free at the state level.
These examples highlight why the state where the deceased lived or owned property can be just as important as the size of the estate. Two heirs receiving the same amount could owe nothing in one state and a significant tax bill in another, purely because of differing state tax laws.
Key Takeaways for Heirs
- ✅ Check the state laws — tax rules vary dramatically.
- ✅ Spouses and close family often receive full or partial exemptions.
- ✅ Federal thresholds are high, so most Americans won’t face estate tax.
- ✅ State taxes can still apply, even for smaller estates.
- ✅ Always consult a tax professional or estate planner for personalized guidance.
Common Misconceptions
❌ “I’ll owe federal income tax on my inheritance.”
→ False. Inheritances aren’t taxed as income federally.
❌ “All inheritances are tax-free.”
→ False. State inheritance or estate taxes can still apply.
❌ “Smaller inheritances are always exempt.”
→ Not always — in some states, even moderate estates can trigger tax.
Conclusion: What’s Really Tax-Free?
In most cases, you can inherit money without paying taxes, especially at the federal level.
The federal estate tax applies only to multimillion-dollar estates, and there’s no federal inheritance tax at all. However, state laws vary, and depending on where the deceased lived, inheritance or estate taxes may still apply.
Your relationship to the deceased also matters — spouses and children are often exempt, while distant relatives may face taxes.
Ultimately, understanding your state’s thresholds and filing rules is key. If you’re managing an estate or expecting an inheritance, consulting a professional can ensure you comply with all requirements and avoid unnecessary taxes.
💬 Have questions about your state’s inheritance rules? Comment below or subscribe for our upcoming 2025 State-by-State Inheritance Tax Guide.