Key takeaways

• The 2026 federal exemption is $15M per person — but some states tax inheritances.
• Estate taxes, inheritance taxes, capital gains taxes, and income taxes can potentially apply.
• Step-up rules may reduce taxes on inherited assets like stocks and real estate.
• Withdrawals from inherited 401(k)s and traditional IRAs can trigger taxes; Roth withdrawals are generally tax-free if rules are met.
• Planning steps such as trusts, charitable gifting, and smart withdrawals can potentially reduce the tax bite.

Whether someone is receiving an inheritance or is planning to pass their assets down to their loved ones, one of the biggest questions that can arise is whether that inheritance will be subject to taxes.

The 4 main types of taxes on inheritances

In some cases, the assets in someone’s estate could be subject to various types of taxes.¹ There are four primary taxes that could apply to an inheritance: estate taxes, inheritance taxes, capital gains taxes, and income taxes.

Estate tax

The estate tax is a federal tax imposed on property transferred after the owner’s death. The tax is owed by the estate, not by the beneficiaries.² In other words, by the time you receive your inheritance, the estate taxes will typically have already been paid.

Many people worry about the estate tax affecting the inheritance they pass along to their children, but the reality is that most families are not affected: In 2026 the federal estate tax threshold is $15 million per individual and $30 million per couple, and will be indexed for inflation going forward. However, some states do have an estate tax, and the rates and exemptions vary.

Estate taxes are based on the size of the estate. It’s a progressive tax, just like the federal income tax system. This means that the larger the estate, the higher the tax rate it is subject to. Twelve states and the District of Columbia impose estate taxes, with rates ranging from 12% to 35%:³
 

• Connecticut
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington
• District of Columbia

Each state has its own estate tax percentage and exemption. Oregon imposes an estate tax on all estates larger than $1 million, while Connecticut’s exemption aligns with the federal estate tax exemption rules.⁴

Inheritance tax

An inheritance tax is a tax that’s imposed on the recipient of an inheritance rather than the estate itself. The federal government doesn’t have an inheritance tax, but a handful of states do:⁵

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Just one state, Maryland, imposes both an estate tax and an inheritance tax — in other words, both the estate and its beneficiaries must pay taxes on the assets transferred after a death.

Who is subject to inheritance taxes and how much they’ll pay varies by state. Each state has certain exemptions in place, just like the IRS does for the estate tax.

In some cases, the exemption differs depending on someone’s relationship to the deceased.⁶ For example, a close relative such as a spouse, child, parent, or sibling might pay no inheritance taxes at all. Meanwhile, there might be exemptions in place from more distant relatives. In other states, inheritance taxes might apply to all beneficiaries, but the closer the relative, the higher the exemption.

Inheritance tax rates vary by state. The top tax rates may be as low as 10% in Maryland and as high as 16% in Kentucky and New Jersey.⁷

Capital gains tax

The capital gains tax is a federal tax imposed on the sale of assets (some states also have a capital gains tax). You may be subject to capital gains taxes when you sell an asset — anything from a share of stock to your home — for more than you paid for it.

Capital gains taxes apply to inheritances when the beneficiary decides to sell any of the assets they’ve inherited. For example, if a grandparent passes away and leaves you $100,000 worth of stock and you later sell it for $150,000, you’ll be subject to capital gains tax on the $50,000 gain.

Federal long-term capital gains are taxed at either 0%, 15%, or 20%. The rate you’ll pay is based on your taxable income for the year.

Inherited asset generally come with a stepped-up cost basis. For example, suppose your grandparent initially purchased that $100,000 of stock for just $25,000 many years ago. You don’t pay capital gains taxes based on the original purchase price of $25,000 initial value. Instead, your cost basis in the asset is its value at the time of your grandparent’s death.⁸

Read more: Ways to avoid or minimize capital gains tax

Income tax

In most cases, an inheritance isn’t subject to income taxes. The assets passed on in an investment or bank account aren’t considered taxable income, nor is life insurance. However, you could pay income taxes on the assets in pre-tax accounts.

Suppose your loved one has significant assets in a 401(k) plan, a traditional IRA, or a health savings account (HSA). Contributions to those accounts are made pre-tax, while withdrawals are generally subject to income taxes.

If you inherit assets in a pre-tax account, you can often choose to roll them over into a pre-tax account. However, if you decide to withdraw the money, it will be considered income and will be subject to ordinary income taxes.  

Common inherited assets and their tax implications

Many different types of assets can result in tax liability when inherited from a loved one. However, there are a handful of assets that are the most likely culprits.

• Stocks and cash: Inherited cash generally isn’t taxable unless the estate exceeds the applicable estate or inheritance taxes. Stocks also aren’t taxable unless they are subject to estate or inheritance taxes but could result in capital gains taxes when you sell them later if it’s for more than inherited value.
• Retirement accounts: The money in inherited pre-tax retirement accounts is considered taxable income if you withdraw it from the account or from a rollover account. Additionally, money in Roth accounts won’t be subject to income taxes upon withdrawal.
• Real estate: A family home or another piece of real estate can be a considerable asset. If you sell the home after you inherit it for more than the inherited value, you could pay capital gains taxes. However, inherited real estate enjoys the stepped-up basis we discussed earlier.
• Art and other collectibles: Real estate isn’t the only valuable physical asset someone might inherit. If you inherit art or other valuable collectibles, it will be subject to similar capital gains rules as any real estate you inherit.
• Life insurance policies: Life insurance policies generally aren’t subject to the same tax rules as other inherited assets. Life insurance is generally not included in the taxable estate if the policy is owned by someone other than the decedent, nor is it considered taxable income. The only tax liability you might be subject to is if you choose to receive the proceeds in installment payments.

Ways to protect your inheritance from taxes

Though taxes most often only apply to large inheritances, they can still place a burden on families already going through a difficult time. If you have received an inheritance, expect to receive an inheritance, or are doing your own estate planning and want to reduce the tax liability for your loved ones, there are several steps you can take to save money on taxes.

Transfer assets into a trust

Certain types of trusts can help avoid estate taxes. An irrevocable trust transfers asset ownership from the original owner to the trust, with assets eventually distributed to the beneficiaries. Because those assets don’t legally belong to the person who set up the trust, they aren’t subject to estate or inheritance taxes when that person passes away.

Setting up a trust also has other financial benefits, such as helping the estate avoid probate. Additionally, a trust can help create privacy during the estate settling process.

Read more: Estate planning primer: Trusts and estates

Minimize pre-tax distributions

Inherited pre-tax retirement accounts can create an income tax burden if you withdraw the money. You can reduce your tax burden by avoiding distributions. There are a few alternatives to consider instead:

• Only take distributions from Roth accounts, which generally aren’t subject to income taxes if the account has been open for five years
• Use a Roth conversion to move pre-tax dollars into a Roth account, which creates an upfront tax burden, but will allow for potentially tax-free withdrawals later on

Implement a gifting strategy

There are a couple of ways strategic gifting can help reduce your tax liability, either on your own estate or on assets you inherit from someone else.

First, to reduce your estate tax liability you could make annual, non-taxable gifts to your beneficiaries during your lifetime. The gift and estate tax share an exemption — known as the unified credit — but the IRS allows you to gift up to $19,000 per person in 2026 without filing a gift tax return or impacting your total gift and estate tax exclusion.⁹

Suppose you have a large estate and plan to divide it among your many children and grandchildren. You could give each of those loved ones up to the gift tax exclusion each year. It would reduce your estate for estate tax purposes while helping you avoid gift taxes.

Another way to implement strategic gifting is to give money to charitable organizations. Charitable gifts are tax-deductible. Additionally, they aren’t considered taxable gifts for gift tax purposes. You can use charitable gifting to either reduce your estate tax liability or offset your tax liability for an inheritance you’ve received.

Read more: Gift tax: What is it and how does it work?

Seeking professional guidance

Most people won’t have to worry about estate taxes and inheritance taxes. However, certain types of taxes on inheritances, including capital gains and income taxes, are far more prevalent.

You may want to consider working with estate planning professionally to help you take steps upfront to set up your estate in a way that potentially minimizes taxes for your beneficiaries. Additionally, if you’ve received an inheritance, an estate or financial professional may be able to help you reduce your tax burden.

Keep in mind that each state has its own laws and taxes in place and it’s important to understand potential inheritance and estate tax liabilities based on your state’s laws.

Final thoughts

Receiving a large inheritance can be emotionally fraught. It may mean you’ve lost someone close to you and having to navigate and pay taxes on your inheritance can add another burden.

Whether you’re planning your own estate or receiving an inheritance from someone else, it’s important to understand the various taxes you might be subject to. Doing research can help you learn about the different ways you can manage your tax liability. Finally, consider hiring a professional who can guide you through the process and potentially help you save money on taxes.

This material is for informational purposes only and is not intended to provide investment, legal, or tax advice.