Do Beneficiaries Have to Pay Taxes on an Inheritance?

The Three Types of Tax That Can Apply to an Inheritance

There are three distinct taxes that families confuse with each other: the federal estate tax, state inheritance taxes, and income tax on certain inherited assets. Each one works differently, is paid by a different person, and applies in different situations.

The federal estate tax is paid by the estate itself — not by the beneficiary. It applies only to estates that exceed the federal estate tax exemption, which is $13.99 million per person in 2025. For married couples, the effective exemption is $27.98 million using portability. Fewer than 0.1% of estates owe any federal estate tax.

A state inheritance tax is paid by the beneficiary — the person receiving the inheritance. Only six states currently impose an inheritance tax: Iowa (being phased out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rate depends on the beneficiary's relationship to the deceased. Spouses are typically exempt. Children and close relatives pay lower rates (often 0% to 6%). Unrelated beneficiaries may pay rates of 10% to 16%.

Income tax applies to certain types of inherited assets — most notably retirement accounts — when the beneficiary takes distributions. This is not a tax on the inheritance itself, but a tax on the income generated when the asset is liquidated or distributed.

What Is Not Taxable

Most direct inheritances are not subject to federal income tax. If a parent leaves a child $500,000 in a bank account, the child does not owe income tax on that amount. Inherited real estate, inherited stocks and bonds, and inherited personal property are generally not taxable at the time of receipt.

Life insurance death benefits paid to a named beneficiary are also income-tax-free. This is one of the most powerful features of life insurance as an estate planning tool — the beneficiary receives the full death benefit without any federal income tax obligation.

Inherited real estate and securities also benefit from the stepped-up basis rule, which resets the cost basis to the fair market value on the date of death. This eliminates any capital gains that accumulated during the deceased person's lifetime.

What Is Taxable: Inherited Retirement Accounts

The most significant tax exposure for beneficiaries comes from inherited retirement accounts — traditional IRAs, 401(k)s, 403(b)s, and similar tax-deferred accounts. Distributions from these accounts are taxed as ordinary income to the beneficiary, because the original owner never paid income tax on the contributions or the growth.

Under the SECURE Act of 2019 (and the SECURE 2.0 Act of 2022), most non-spouse beneficiaries must withdraw the entire balance of an inherited IRA within 10 years of the original owner's death. This compressed timeline can push beneficiaries into higher tax brackets, particularly if the inherited account is large. Strategic distribution planning — spreading withdrawals across the full 10-year window — can reduce the overall tax impact.

Spouse beneficiaries have more options, including rolling the inherited IRA into their own IRA and treating it as their own, which defers distributions until the spouse reaches their own required minimum distribution age.

State Inheritance Taxes: The State-by-State Factor

If the deceased person lived in — or owned property in — one of the six states with an inheritance tax, the beneficiary may owe state-level tax on their share. The rates and exemptions vary significantly. Pennsylvania, for example, taxes inheritances to children at 4.5%, to siblings at 12%, and to other beneficiaries at 15%. New Jersey exempts spouses and direct descendants entirely but taxes others at rates up to 16%.

Maryland is the only state that imposes both an estate tax and an inheritance tax, creating a potential double layer of taxation on some estates. Careful planning — including the use of trusts, lifetime gifts, and beneficiary designations — can reduce or eliminate the impact of state-level taxes.

Capital Gains on Inherited Property

Inherited real estate and investments receive a stepped-up basis, which means the beneficiary's cost basis is the fair market value on the date of death — not the original purchase price. If the beneficiary sells the asset at or near this value, there is little or no capital gain to tax.

However, any appreciation that occurs after the date of death is subject to capital gains tax when the asset is sold. If a parent dies when a home is worth $400,000 and the child sells it two years later for $450,000, the capital gain is $50,000 — not the full difference from the original purchase price. The stepped-up basis eliminated all prior appreciation.

The Bottom Line

For most families, the answer to "do beneficiaries have to pay taxes on an inheritance?" is: not as much as you think. Direct inheritances of cash, real estate, and investments are generally not subject to federal income tax. The federal estate tax applies only to very large estates. State inheritance taxes apply in only six states. The main tax exposure comes from inherited retirement accounts, which are taxed as ordinary income when distributions are taken. Understanding these distinctions — and planning around them — can save beneficiaries thousands of dollars and eliminate unnecessary anxiety during an already difficult time.