Do You Pay Tax on an Inheritance? Federal Rules, the States That Tax Heirs, and the Step-Up
The Million Dollar Question: How many U.S. states currently charge an inheritance tax that the heir — not the estate — pays directly?
A) 0 B) 5 C) 17 D) All 50Read on for the answer.
Most people who ask “do I owe tax on this inheritance” are really asking two different questions at once, and the honest answer to the first one is almost always no. The honest answer to the second one — what happens to an inherited IRA, or an inherited house, or a check from a state that still taxes heirs directly — has more exceptions than most people expect.
What it is — the question behind the question
An inheritance tax and an estate tax are not the same thing, and the confusion between them is where most of the bad information starts. An estate tax is levied on the estate itself, before anything reaches an heir, based on the size of the whole estate. An inheritance tax is levied on the heir, based on what that specific person received and how closely they were related to the deceased. The United States has a federal estate tax — covered in detail separately, it reaches only estates above $15 million per person in 2026 — but it has no federal inheritance tax at all.
That’s not a loophole; it’s written directly into the tax code. 26 U.S.C. § 102(a) states plainly that “gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” Whether someone leaves a spouse $50,000 or $50 million, the money or property itself is not income to the person who receives it, and it does not get reported as income on a federal return. The same section carves out two things the exclusion does not cover: income the inherited property earns after you receive it (dividends, rent, interest), and — more subtly — cases where what’s inherited is itself a right to future income rather than a capital asset. That second carve-out turns out to matter a great deal, and it’s the subject of the section on retirement accounts below.
Who actually owes something — the five states
Federal law is the easy part. Five states still layer their own tax directly onto the heir: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, according to the Tax Foundation’s state-by-state tracker. Iowa was the sixth state on this list as recently as 2024; its repeal took full effect for deaths occurring on or after January 1, 2025, leaving the current group at five.
All five exempt a surviving spouse outright, and most lightly tax or fully exempt children and other close lineal relatives — Kentucky and Nebraska exempt them entirely, New Jersey exempts children, parents, and grandchildren, and Maryland exempts lineal descendants and siblings. Pennsylvania is the outlier: it taxes even a decedent’s own children and grandchildren at a flat 4.5%, with no dollar exemption at all, though a surviving spouse and minor children remain exempt. Every state in the group reserves its highest rates — generally 15% to 16%, per Policygenius’s state-by-state guide — for unrelated beneficiaries: friends, domestic partners who aren’t legally recognized, distant relatives, and in several states, nieces and nephews. Maryland is the one state in the group that also levies its own separate estate tax (above a $5 million exemption), so a Maryland estate can face both taxes at once — one on the estate, one on certain heirs — which is unusual even among the states that tax wealth transfers at all.
The five-state club is also a shrinking one, and the history explains why it’s shrinking. Pennsylvania adopted the country’s first state inheritance tax in 1826, and by 1916 — when the federal estate tax itself was created — 43 states had some form of inheritance or estate tax on the books, many of them adopted in a wave after a 1926 federal tax credit effectively rewarded states for having one. That federal credit was phased out entirely by 2005, and states began repealing their inheritance and estate taxes without it; Iowa’s 2025 repeal is simply the most recent entry in a two-decade pattern, not an isolated event.
Practically, a state inheritance tax return is typically filed by the estate’s executor on the heir’s behalf, within a window that runs anywhere from nine to eighteen months after death depending on the state, and the tax is generally paid out of the inheritance itself before the heir ever sees the balance — so in most cases there’s no separate check to write later. The takeaway for the other forty-five states: unless you live in one of the five, or the person who left you the inheritance did, the inheritance itself is not going to generate a state inheritance-tax bill either. (A different, larger group of states has its own estate tax, which is a separate question covered in the companion piece on the state layer of estate and inheritance tax.)
Inherited retirement accounts — the 10-year rule
The place where “no federal tax on an inheritance” most often surprises people is the retirement account. A traditional IRA or 401(k) is not like a stock portfolio, and the SECURE Act of 2019 rewrote the rules for almost everyone who inherits one.
Before 2020, a non-spouse beneficiary could generally stretch withdrawals from an inherited IRA across their own life expectancy — the “stretch IRA.” The SECURE Act replaced that, for most beneficiaries who aren’t a spouse, a minor child, disabled, chronically ill, or within ten years of the deceased’s age, with a flat 10-year window: the account must be fully emptied by December 31 of the tenth year after the year of death. For several years it was unclear whether anything had to come out during those ten years, or only by the final deadline. The IRS’s final regulations, issued in 2024, settled the question: if the original account owner had already reached their required beginning date for RMDs before they died, the heir must take an annual required minimum distribution in each of years one through nine, in addition to emptying the account by year ten. If the owner died before that age — which is always true for a Roth IRA, since Roth owners never face lifetime RMDs — only the ten-year emptying deadline applies, with no annual minimum in between.
The IRS waived penalties for missed annual RMDs under this rule for 2021 through 2024 while the regulations were being finalized. Starting with 2025 distributions, the normal penalty applies: a 25% excise tax on the amount that should have been withdrawn and wasn’t, reduced to 10% if the shortfall is corrected within two years. A surviving spouse has an option no other beneficiary gets — rolling the inherited account into their own IRA, after which the 10-year rule simply doesn’t apply, and ordinary lifetime RMD rules take over instead.
The same 10-year framework applies to an inherited Roth 401(k) and most non-qualified deferred-compensation balances, with the same practical split: no annual minimum if the original owner had no required beginning date, a full emptying required by year ten regardless. Inherited non-qualified annuities follow a related but distinct rule of their own — payments are taxed under an exclusion ratio that separates principal from the investment gain inside the contract, so part of each payment is taxable and part isn’t, rather than the all-or-nothing split that applies to a brokerage account versus an IRA.
None of this is a tax on the inheritance itself; the account passes to the heir with no immediate tax bill. The tax arrives gradually, as ordinary income, on whatever is withdrawn — which is really the same deal the original owner had, just compressed into a decade instead of a lifetime.
The step-up in basis
Capital assets work completely differently, and far more favorably. When someone inherits stock, a house, or a business interest, the asset’s cost basis resets to its fair market value on the date of death — the step-up in basis, confirmed as the default rule in IRS Publication 551. If an estate’s personal representative formally elects an alternate valuation date (generally six months after death, used when asset values have fallen), that value controls instead. Either way, every dollar of appreciation that built up during the decedent’s lifetime simply disappears for tax purposes — it’s never taxed to anyone. Sell the stock the week after it was transferred to you, at the same price it was worth on the date of death, and there is no capital gain to report at all; a gain shows up only on the appreciation that happens after you inherit it.
There’s one narrow trap worth knowing: if you gave the decedent the asset within the year before their death, and the asset had appreciated while you owned it, your basis reverts to the decedent’s original (lower) basis rather than stepping up — a rule aimed squarely at last-minute, death-bed basis engineering.
Income in respect of a decedent — the exception that swallows retirement accounts
Here is the piece most explainers skip, and it’s the real answer to “does it matter whether I inherited income or principal.” Tax law draws a hard line between capital assets, which step up, and income in respect of a decedent (IRD) — income the decedent had earned but not yet received as of the date of death — which does not. The IRD category includes unpaid salary or commissions, deferred compensation, interest accrued on savings bonds, and critically, the balance of a traditional IRA, 401(k), or other tax-deferred retirement account. None of it gets a basis adjustment; the heir simply steps into the decedent’s shoes and pays ordinary income tax on it as it’s withdrawn, exactly as the original owner eventually would have.
This is the distinction that “do you pay tax on an inheritance” is really asking about, even when the question isn’t phrased that way. A $500,000 inherited stock portfolio and a $500,000 inherited traditional IRA look identical on an estate inventory. One of them can be sold the same week for $500,000 with no federal income tax due. The other generates an ordinary-income tax bill — potentially a large one, since withdrawals stack on top of the heir’s own income — spread across the ten years it takes to empty the account.
How it actually plays out — a worked comparison
Picture four heirs, each receiving $200,000, to make the differences concrete. The first inherits $200,000 in a taxable brokerage account holding appreciated stock: no federal or state tax on receiving it, and if it’s sold immediately at the stepped-up value, no capital gains tax either — only future appreciation is ever taxed. The second inherits $200,000 in a traditional IRA: also no tax on receiving it, but every dollar withdrawn over the following ten years is taxed as ordinary income, at whatever bracket the withdrawal pushes them into. The third inherits the same $200,000 as a life insurance death benefit: under IRC Section 101(a), that payout is free of federal income tax to the named beneficiary, full stop — a separate and even cleaner exclusion than the one that covers ordinary inheritances. The fourth inherits the same $200,000 in cash, but is an unrelated beneficiary living in Pennsylvania: a flat 15% inheritance tax applies to the transfer itself, regardless of what form the $200,000 takes, simply because of who they are to the deceased and where they live. Same dollar amount, four different structures, and only the last one generates any tax at the moment of inheriting.
What people get wrong
That “inheritance tax” and “estate tax” are interchangeable. They aren’t, and most headlines about a “death tax” are actually describing the federal estate tax, which the heir never personally owes — it’s paid and settled by the estate before distribution.
That the step-up in basis applies to everything inherited. It applies to capital assets. It does not apply to IRAs, 401(k)s, deferred compensation, or other income in respect of a decedent — the single most expensive misunderstanding in this entire topic, because it leads people to assume an inherited IRA is as tax-free as an inherited brokerage account.
That the 10-year rule means nothing is due until year ten. If the original owner had already reached their required beginning date for RMDs, the heir owes an annual minimum distribution in years one through nine on top of the year-ten deadline — missing one now carries a real penalty, not just a late-fee inconvenience.
That no state taxes inheritances anymore. Five still do, and a state inheritance tax has nothing to do with the size of the overall estate — it’s calculated on what a specific heir received and how they were related to the person who left it, which is why two siblings inheriting the same amount from the same estate can owe completely different amounts, or nothing at all.
Bottom line
The Million Dollar Question, answered: B, five states. Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are the only states that still tax an heir directly on an inheritance, and the federal government does not tax inheritances at all — the baseline rule really is “no,” for the overwhelming majority of people in the other forty-five states. What actually generates a tax bill downstream isn’t the inheritance itself; it’s what the inheritance is made of. A stepped-up stock portfolio or house can often be sold with no capital-gains consequence at all. A traditional IRA carries its own ten-year clock and an ordinary-income tax bill no basis adjustment will ever erase. Knowing which bucket an inheritance falls into — capital asset or income in respect of a decedent — matters far more than knowing whether any tax applies to begin with.
Related reading: How the Estate Tax Works: Who Actually Pays It, and How Little It Raises · What Is a Trust Fund? What It Does, What It Costs, and Who Actually Needs One · Trust vs. Will: What Each One Does, What Each One Costs, and When You Need Both · Inheritance: The Transfer of Wealth Between Generations · How to Set Up a Trust Fund — and What It Really Costs
