What Does “Inheritance” Really Mean?
When someone passes away, their assets — money, property, investments, or valuables — are passed down to heirs or beneficiaries. This transfer of wealth is called inheritance.
But the rules around taxing inheritances can be confusing. There isn’t one single “inheritance tax” — instead, different kinds of taxes may apply depending on who you are, where you live, and how much you inherit.
In the United States, the good news is that most people will not pay federal tax on their inheritance. However, several states impose their own inheritance or estate taxes, and their rules can vary widely.
Key Tax Types and How They Apply
1. Federal Income Tax on Inheritances
According to the IRS, you do not pay federal income tax simply because you received an inheritance (IRS.gov).
However, income earned from inherited assets after the transfer is taxable. Examples include:
- Dividends or interest on inherited investments
- Rent from inherited property
- Distributions from inherited retirement accounts (like 401(k)s or IRAs)
Vanguard adds that inherited property benefits from a “step-up in cost basis”, which means you’ll only owe tax on gains after the date of inheritance — not since the asset was originally purchased.
Bottom line: You don’t pay income tax on receiving an inheritance, but you may pay taxes on future income generated by those inherited assets.
Read In details: Federal Income Tax on Inheritances (2025 Guide)
2. Federal Estate Tax
The federal estate tax is a tax on the deceased person’s estate before assets are distributed to heirs (IRS.gov).
The Center on Budget and Policy Priorities notes that only the very wealthiest estates — less than 0.1% — pay this tax.
In 2025, the federal estate tax exemption is $13.99 million per person, according to NerdWallet. Married couples can effectively double that to nearly $27.98 million through portability rules.
👉 That means 99.9% of estates owe no federal estate tax at all.
3. State Inheritance Tax
Unlike the federal government, a few states do tax the recipients of inheritances.
Bankers Life explains that inheritance tax is paid by the heir on the amount they receive — not by the estate.
According to Vanguard, only six states currently impose inheritance taxes:
Iowa (repealed in 2025), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Rates range from 1% to 16%, depending on your relationship to the deceased. Spouses are usually exempt, while nieces, nephews, or unrelated beneficiaries may face higher rates.
4. State Estate Tax
A state estate tax is separate from the federal one. It’s levied on the estate before distribution and applies in about a dozen states.
As reported by Tax Foundation, thresholds can be much lower than federal levels — meaning even moderate estates may face taxes.
Examples for 2025:
- Oregon: $1,000,000 exemption
- Massachusetts: $2,000,000 exemption
- New York: $7,160,000 exemption
- Washington State: $2,193,000 exemption
If an estate is below the federal limit but above a state’s lower threshold, state estate tax can still apply.
How Much Can You Inherit Without Paying Taxes?
At the Federal Level
There is no federal inheritance tax — meaning you will not be taxed for receiving an inheritance (Vanguard).
However, the federal estate tax applies to estates worth more than $13.99 million in 2025 (NerdWallet).
Thus, unless your loved one left behind an estate exceeding that amount, your inheritance should be federally tax-free.
At the State Level
Here’s where things vary most.
The amount you can inherit tax-free depends on:
- The state where the deceased lived or owned property
- Your relationship to them
- The total value of the estate
Nolo.com notes that inheritance taxes apply in only a few states, but Tax Foundation highlights that some estate tax exemptions start as low as $1 million.
For example:
- Pennsylvania: 0%–15% inheritance tax depending on relationship
- Nebraska: 1%–15% inheritance tax for distant heirs
- Maryland: 16% estate tax plus up to 10% inheritance tax
- Oregon: Estate tax on estates over $1 million
In some cases, you could inherit up to $100,000 before state inheritance tax kicks in, according to Partners Financial.
Relationship Matters
Per Bankers Life, your relationship to the deceased heavily affects your tax treatment:
- Spouses: usually fully exempt
- Children and grandchildren: often enjoy generous exemptions
- Distant relatives or non-family members: typically face higher rates and lower thresholds
Other Important Considerations
- Inherited assets that generate income later (like rent or dividends) are taxable as normal income.
- Gifts made before death may count toward the estate tax calculation.
- Multi-state estates can be taxed differently based on property location.
Practical Thresholds & Real-World Examples
Federal Example
If an estate is worth $10 million in 2025, it is below the $13.99 million federal threshold, meaning no federal estate tax is owed. Heirs receive the inheritance tax-free at the federal level.
State Examples
- Oregon: Estate tax applies to estates exceeding $1 million.
- Maryland: Estate tax applies over $5 million; inheritance tax applies to non-immediate heirs.
- Florida: No estate or inheritance tax — fully tax-free.
These differences show why state of residence is a major factor in determining how much you can inherit without paying taxes.
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.