Inheritance Tax Guide 2026: State-by-State Rules, Exemptions & Calculator

Inheriting money or property is not the same as keeping all of it. Between federal estate tax, state inheritance tax, and capital gains rules on inherited assets, what you owe depends on where the deceased lived, where you live, and what you inherited. This guide covers 2026 rules with exact numbers.

Estate Tax vs. Inheritance Tax: The Key Difference

People mix these up constantly:

• Estate tax is paid by the estate itself before assets are distributed. It is federal (plus 12 states with their own).
• Inheritance tax is paid by the beneficiary after receiving assets. There is no federal inheritance tax — only 5 states levy one in 2026.

Federal Estate Tax in 2026

The One Big Beautiful Bill Act set the federal estate tax exemption at $15 million per person for 2026 (double the prior level), indexed for inflation afterward. Married couples can port any unused exemption, effectively shielding $30 million.

For over 99.9% of estates, no federal estate tax is due. If you are anywhere near the threshold, an estate-planning attorney is worth far more than their fee.

Which States Have an Inheritance Tax in 2026?

Five states tax inheritances at the beneficiary level:

Iowa's inheritance tax fully ended for deaths on or after January 1, 2025. Rates everywhere depend on your relationship to the deceased — distant relatives and non-relatives pay the most, surviving spouses always pay $0. Siblings and other relatives fall in between: for example, siblings face 4–16% in Kentucky, 10% in Maryland, 6–11% in Nebraska, 11–16% in New Jersey, and 12% in Pennsylvania.

Example: You inherit $200,000 from a friend in Pennsylvania. As a Class D beneficiary, the first $3,000 is taxed at 4.5% and the rest at 15% — roughly $29,565 in state inheritance tax before any other costs.

The Step-Up in Basis: The Biggest Tax Break in Inheritance

This is the part most beneficiaries miss. When you inherit an asset, its cost basis steps up to the fair market value on the date of death.

Example: Your grandmother bought stock for $20,000. At her death it is worth $180,000. Your basis is $180,000 — not $20,000.

• Sell immediately: you owe $0 capital gains tax on the $160,000 of appreciation. Her gain dies with her.
• Hold and it grows to $200,000: you owe tax only on the $20,000 above the stepped-up basis.

Community-property states (like California, Texas, Arizona, Washington) get a double step-up for surviving spouses — the entire property resets, not just the decedent's half. Estimate the gain on other assets with our Capital Gains Tax Calculator.

State Income Tax on Inherited IRAs and 401(k)s

Inherited pre-tax retirement accounts are a different animal — the money was never taxed, so distributions are taxed as ordinary income to you. The SECURE Act requires most non-spouse beneficiaries to empty inherited IRAs within 10 years (the "10-year rule").

States that currently exempt or exclude inherited IRA income from state income tax — including Illinois's retirement-income exclusion — can soften the blow. Check your state's retirement taxation with our 50 state tax calculators.

Do You Need to Report an Inheritance to the IRS?

No. Inheritances are not taxable income on Form 1040. You report:

1. Distributions from inherited pre-tax IRAs/401(k)s — ordinary income (1099-R)
2. Capital gains after you sell inherited assets — only the gain above the stepped-up basis
3. Inherited Roth IRAs — tax-free if the account was open 5+ years

Frequently Asked Questions

Is there a federal inheritance tax?

No. The federal government taxes large estates (over $15 million in 2026), not the people who inherit from them.

Do I pay tax on money my parents left me?

Not on the inheritance itself. Inheritance tax applies only in the five states listed above, and lineal descendants (children, grandchildren) are fully exempt in every one of them. Gains only get taxed when you sell.

Can I refuse an inheritance?

Yes — via a qualified disclaimer filed within 9 months. Useful when an inherited asset carries more tax or debt than value, or when the money would pass more efficiently to the next beneficiary.

Which states have their own estate tax?

Twelve states levy a separate estate tax (paid by the estate, like the federal one) with much lower exemptions than the federal $15 million. Examples: Oregon starts at $1,000,000, Massachusetts at $2,000,000, Washington at $2,193,000, and New York at $6,940,000, with top rates of 16%–20% depending on the state.

Can estate tax be paid in installments?

Yes. Under IRC Section 6166, estates that include a closely held business can spread the federal estate tax over as many as 15 years, with the first payment due 5 years after the date of death. Interest is charged on the deferred tax, but a special 2% rate applies to the first $1.5 million of taxable estate (inflation-adjusted).

Is real estate tax the same as estate tax?

No. Real estate (property) tax is an annual tax on property you own, paid to your local government. Estate tax is a one-time tax on the transfer of a deceased person's estate, paid by the estate. Inheriting a house can expose you to the first every year you own it — but only very large estates trigger the second.

How can I estimate what I'll actually keep?

Add the stepped-up basis rules (for property), the 10-year rule (for pre-tax retirement accounts), and your state's inheritance tax (if you are a non-lineal beneficiary in one of the five states). Our Tax Refund Calculator handles the income side once distributions hit your return.

Related Calculators

• Capital Gains Tax Calculator — stepped-up basis scenarios
• Tax Refund Calculator — how distributions affect your refund
• 401(k) Retirement Calculator — inherited-account growth projections