Do You Have to Pay Taxes on Inheritance in the United States in 2025?

Most people hear the term inheritance tax and imagine the government sweeping in to take a huge slice of what a loved one left behind. The reality in 2025 is more technical and, for most households, far less painful.

Taxes on inherited wealth depend on who died, where they lived, and what exactly changed hands.

The key is to separate three layers: federal estate tax, state estate tax, and state inheritance tax, along with the occasional income tax on inherited assets. Once those categories are clear, the system starts to make sense. Let’s clear this up further.

Important Highlights

• There’s no federal inheritance tax in 2025; only very large estates over $13.99 million face the federal estate tax.
• Five states (KY, MD, NE, NJ, PA) still have inheritance taxes, while twelve states and D.C. impose estate taxes.
• Most heirs owe no tax on receiving inheritances but may face income or capital gains tax when selling or earning from inherited assets.
• Inherited property gets a “step-up in basis,” reducing taxable gains on future sales.

The Big Picture in 2025

According to TaxAct, in 2025, the United States still has no federal inheritance tax. There is, however, a federal estate tax, and it only affects very large estates.

Clark County Bar Association reported that for the 2025 tax year, the combined federal gift and estate tax exclusion stands at $13.99 million per person, unified across lifetime gifts and transfers at death.

That means if an individual leaves behind less than $13.99 million in total taxable assets (including large gifts made during life), no federal estate tax applies. If they leave more, the tax applies to the portion that exceeds that threshold.

Only a fraction of estates in the country ever reach that level. Analysts estimate that fewer than one in every thousand deaths in 2025 result in a federal estate tax return, much less an actual tax bill.

Beyond those, income and capital gains tax rules can apply when an heir later sells inherited property or withdraws funds from inherited retirement accounts. The result is that while most heirs never write a check labeled “inheritance tax,” taxes can still appear at several stages.

Federal Rules – No Inheritance Tax, Only a Large Estate Tax

At the federal level, heirs don’t pay tax for receiving an inheritance. Instead, the estate itself may face a tax, but only if it’s very large.

No Federal Inheritance Tax

The IRS does not treat inherited money or property as taxable income. If you receive $100,000 in cash or stock from an estate, you don’t owe federal income tax just for receiving it.

The term “death tax” gets thrown around politically, but at the federal level, it refers only to the estate tax, paid by the estate, not the heirs.

Also, drafting a will using a service like Loio can align your estate with the exclusion thresholds.

How the Federal Estate Tax Works

The federal estate tax is a transfer tax on the right to transfer property at death. The estate itself files a return (Form 706) and pays any owed tax before distributing assets to heirs, according to the IRS official information.

Basic Process

• Calculate the gross estate, everything the deceased owned or controlled at fair market value:
  1. Real estate
  2. Investments and business interests
  3. Retirement accounts, in some cases
  4. Certain life insurance proceeds payable to the estate
• Subtract allowable deductions:
  1. Debts and mortgages
  2. Funeral and administrative costs
  3. Transfers to a surviving spouse or charity
• The remainder forms the taxable estate.
• Add any taxable lifetime gifts to align with the unified system.
• Apply the unified credit and estate tax rate schedule.

Federal estate tax rates start at 18 percent and top out at 40 percent.

The 13.99 Million Dollar Exclusion

For 2025, the federal gift and estate tax exclusion is $13.99 million per person. The number matters because it effectively shields nearly all family estates from the federal estate tax.

Key Features

• The exclusion is unified across lifetime gifts and estate transfers. Every taxable gift made above the annual exclusion (set at $19,000 per recipient in 2025) reduces what’s left of the lifetime cap.
• Married couples can combine exclusions for an effective $27.98 million shield if the executor elects portability, transferring the unused exclusion from the first spouse to die.
• According to LDM Law, amounts above the exclusion face estate tax at graduated rates up to 40 percent.

Congress also passed legislation known as the One Big Beautiful Bill Act, which sets a permanent $15 million exemption per individual starting after 2025, indexed for inflation. For now, though, $13.99 million is the operative number.

Because the threshold is so high, the estate tax touches only the wealthiest households, roughly the top 0.1 percent of estates nationwide.

Income Tax Treatment of Inherited Assets

Even when estate or inheritance tax never comes into play, income tax can appear later. The IRS generally distinguishes between receiving an inheritance (non-taxable) and earning income from what you inherited (taxable).

Cash and Bank Accounts

Cash inheritances are straightforward. You don’t owe federal income tax when the money arrives, but:

• Interest earned after you receive it counts as taxable income.
• Dividends or gains from investing the inherited money are taxable as usual.

Inherited Investments and the Step-Up in Basis

One of the most valuable provisions in U.S. tax law for heirs is the step-up in basis. When you inherit an asset, say, stock or real estate, its tax basis resets to its fair market value on the date of death.

Example:

The built-up gain during the parents’ lifetime disappears. Only growth after the inheritance date becomes taxable. This “reset” often saves families enormous capital gains taxes.

Inherited Real Estate

The same rule applies to real property:

• The home’s basis steps up to fair market value at the date of death.
• If the heir sells immediately, there’s usually little or no gain.
• If they hold and the property appreciates, only the increase after inheritance counts as taxable gain.
• If the heir uses the inherited property as a primary home, they can still qualify for the home sale exclusion, up to $250,000 of gain for single filers or $500,000 for many married couples.

Inherited Retirement Accounts

Inherited retirement accounts follow a different logic. They carry deferred income tax, and those taxes eventually come due.

• Traditional IRAs and 401(k)s: withdrawals are taxed as ordinary income.
• Spouse beneficiaries can roll the account into their own IRA and continue deferring tax.
• Non-spouse beneficiaries of accounts inherited from someone who died after 2019 generally fall under the 10-year rule from the SECURE Act: the account must be emptied by the end of the tenth year after death.
• In 2025, most non-spouse beneficiaries must also take annual required minimum distributions (RMDs) within that period.
• Roth IRAs behave differently: qualified distributions are typically tax-free, though beneficiaries still must withdraw funds within 10 years.

Failing to meet distribution rules can trigger penalties and back taxes.

Life Insurance Payouts

Life insurance benefits paid directly to a named individual are federally tax-free. The exception is when interest accrues on delayed payouts, as interest is taxable as ordinary income.

If the life insurance is payable to the estate rather than an individual, the proceeds may count toward the estate’s taxable value for estate tax purposes.

State Inheritance Taxes in 2025

While the federal government doesn’t impose an inheritance tax, five states do: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

The rules vary widely, but they share one trait: spouses are always exempt.

Kentucky

Kentucky divides heirs into three classes:

• Class A: spouse, parents, children, and some other close relatives – fully exempt.
• Class B: nieces, nephews, aunts, uncles, and similar relatives – $1,000 exemption, rates from 4% to 16%.
• Class C: cousins, friends, unrelated individuals – $500 exemption, rates roughly 6% to 16%.

Maryland

Maryland is unique in levying both an estate tax and an inheritance tax.

• Estate tax: 5 million dollar exemption, with rates up to 16%.
• Inheritance tax: flat 10% on transfers to non-exempt beneficiaries; spouses, parents, lineal descendants, and siblings are generally exempt.

Nebraska

Nebraska’s inheritance tax is administered at the county level. Rates and exemptions depend on relationship and local rules, with top rates around 15% for distant heirs.

New Jersey

New Jersey no longer has an estate tax, but it still enforces an inheritance tax:

Pennsylvania

Pennsylvania has no estate tax, but it does have an inheritance tax:

Jointly owned property between spouses is exempt when the second spouse dies.

Iowa

Iowa’s inheritance tax is officially gone as of January 1, 2025. Deaths occurring in 2025 or later owe no state inheritance tax.

State Estate Taxes in 2025

Beyond those five inheritance-tax states, twelve states plus D.C. maintain estate taxes. These apply to the estate itself, not the heirs, and operate similarly to the federal estate tax but with lower exemptions.

State estate taxes are paid by the executor before beneficiaries receive distributions. Beneficiaries themselves don’t file separate state inheritance tax returns unless the state also imposes an inheritance tax.

Common Scenarios in 2025

Every inheritance plays out differently, but a few situations keep showing up. Here’s how taxes typically work in real-world cases.

1. You Inherit $100,000 in Cash

• No federal income tax on receipt.
• No federal inheritance tax.
• No estate tax issue if the estate was under $13.99 million.
• No state inheritance or estate tax if the decedent lived in a state without those taxes (for example, Florida or Texas).
• Future earnings or gains from investing the money are taxable as usual.

2. You Inherit a House

• Basis steps up to fair market value at death.
• Selling immediately often triggers little or no capital gain.
• Selling years later may trigger tax only on appreciation after death.
• If used as your main home, you can claim the $250,000/$500,000 home sale exclusion on future gains.

3. You Inherit from a Relative in Pennsylvania

Federal estate tax likely doesn’t apply. Pennsylvania imposes an inheritance tax:

• 5% for direct descendants
• 12% for siblings
• 15% for others
• 0% for spouses

Executors usually withhold and remit the tax before final distribution.

4. You Inherit a Traditional IRA

• Withdrawals count as ordinary income to you.
• Most non-spouse heirs must empty the account within 10 years.
• Annual RMDs may apply depending on the original owner’s age.
• Missing required distributions can trigger penalties.

Practical Takeaways for 2025

A few central truths define the 2025 inheritance tax landscape:

1. No federal inheritance tax exists. Heirs don’t pay federal income tax simply for receiving inherited assets.
2. Federal estate tax applies only to estates exceeding $13.99 million per person, or about $27.98 million for a married couple with proper planning.
3. Five states still collect a true inheritance tax. Twelve states and D.C. impose estate taxes, often at much lower thresholds.
4. Location matters - the decedent’s state of residence and, in some cases, the property’s location determine whether state-level taxes apply.
5. Inherited assets generally receive a step-up in basis, minimizing capital gains on sale.
6. Retirement accounts and deferred-tax assets can still generate substantial taxable income after inheritance.
7. Life insurance paid directly to a beneficiary remains federally tax-free.

In practice, almost all middle-income families in 2025 inherit without paying any estate or inheritance tax. The most common tax exposure arises not from receiving wealth, but from later selling or using what was inherited.

Anyone dealing with complex estates or multiple states’ rules should work with a qualified tax professional or estate attorney to ensure compliance.

Quick Reference for 2025

Final Words

In 2025, inheriting money or property rarely triggers a tax bill on arrival. The federal estate tax applies only to ultra-wealthy estates, while state inheritance and estate taxes touch a limited set of regions and relationships.

For most families, taxes come into play only when the inherited assets start producing income or are eventually sold.

The key to staying compliant and minimizing liability lies in knowing where the decedent lived, what type of assets are involved, and how those assets are used afterward.

Estate law remains one of the few areas where local details make all the difference, and where the right professional advice can keep an inheritance intact.