How Will Inheriting Money Affect My Taxes This Year?
Last reviewed: July 2026
Inheriting money usually does not trigger federal income tax. Cash you inherit comes to you tax-free, and most inherited assets get a valuable tax break called a step-up in basis. The real tax exposure shows up in three specific places: inherited retirement accounts, state-level inheritance and estate taxes, and capital gains when you eventually sell inherited property. Knowing which bucket your inheritance falls into tells you whether you owe anything at all.
Key Takeaways
- Inherited cash is not taxed as income at the federal level; you receive it tax-free.
- The 2026 federal estate tax exemption is $15 million per person, so most estates owe no federal estate tax.
- Inherited traditional IRAs are taxed as ordinary income, and most non-spouse heirs must empty them within 10 years.
- Step-up in basis resets an inherited asset's cost basis to its date-of-death value, erasing built-up capital gains.
- Maryland is the only state that levies both an estate tax and an inheritance tax.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate inheritance and estate tax questions since earning his CFP® certification in 2013, by using Chesapeake Financial Planners’ signature process, the R.U.D.D.E.R. method™. Jeff sees the same mistake every year: people panic about taxes on the inheritance itself when the real bill almost always comes from an inherited IRA nobody planned for.
Do You Pay Income Tax on Inherited Money?
In most cases, no. The IRS does not treat an inheritance as taxable income to the person receiving it. If your aunt leaves you $200,000 in cash, that money lands in your account without a federal income tax bill attached.
The confusion comes from mixing up two different taxes. The estate tax is paid by the deceased person's estate before anything reaches you. Income tax on an inheritance, for most assets, simply does not exist. What does get taxed is income those assets generate after you own them, and withdrawals from inherited retirement accounts.
So the answer to "how will inheriting money affect my taxes this year" depends almost entirely on what you inherited, not how much. A million dollars in cash creates no income tax. A $400,000 inherited traditional IRA creates a tax problem that can last a decade.
Does the Federal Estate Tax Apply to Your Inheritance?
For nearly everyone, no. The 2026 federal estate tax exemption is $15 million per person, or $30 million for a married couple. If the estate is worth less than that, no federal estate tax is owed at all.
When an estate does exceed the exemption, the estate pays the tax, not you. By the time the inheritance reaches your hands, that obligation has already been settled. According to the IRS, the estate tax is "a tax on your right to transfer property at your death," which means it belongs to the estate, not the beneficiary.
Jeff Judge often reminds clients that fewer than one in a thousand estates owes federal estate tax. If you are reading this worried about a $300,000 inheritance, the federal estate tax is not your concern. State taxes might be.
How Can I Reduce Capital Gains Taxes on My Investments?
How Do State Inheritance and Estate Taxes Work?
This is where geography matters. A handful of states impose their own estate or inheritance taxes, and their exemption thresholds run far below the federal level.
| Tax Type | Who Pays | States That Levy It |
|---|---|---|
| State estate tax | The estate, before distribution | CT, HI, IL, ME, MA, MD, MN, NY, OR, RI, VT, WA, DC |
| State inheritance tax | The beneficiary, after receiving assets | KY, MD, NE, NJ, PA |
Maryland stands alone as the only state with both. The Maryland estate tax exemption sits at $5 million, well under the federal figure, and the Maryland inheritance tax runs up to 10% for beneficiaries who are not close relatives. Spouses, children, parents, and siblings are exempt from the Maryland inheritance tax. A niece, nephew, friend, or unrelated heir is not.
If you inherit from someone who lived in one of these states, you may owe state tax even when no federal estate tax applies. Rates and exemptions vary by your relationship to the deceased, so the same inheritance can be tax-free for a child and taxable for a cousin.
What Is the Step-Up in Basis?
The step-up in basis is one of the most valuable tax breaks in the entire code, and most heirs do not know they have it. When you inherit appreciated property, your cost basis resets to the fair market value on the date of death. Every dollar of appreciation that built up during the deceased person's lifetime vanishes for tax purposes.
Here is what that means in dollars. Say your father bought a house in 1985 for $90,000, and it is worth $540,000 when he dies. If he had sold it while alive, he would owe capital gains tax on $450,000 of appreciation. You inherit it instead, and your basis becomes $540,000. Sell it the next week for $540,000 and you owe zero capital gains tax.
The step-up applies to real estate, stocks, mutual funds, and most other capital assets. It does not apply to retirement accounts, which is exactly why inherited IRAs are the part of an inheritance that hurts.
What Is the Difference Between Marginal and Effective Tax Rate?
How Are Inherited Retirement Accounts Taxed?
Inherited traditional IRAs and 401(k)s are the major exception to the "inheritances are tax-free" rule. Every dollar you withdraw is taxed as ordinary income, and under the SECURE Act, most non-spouse beneficiaries must empty the account within 10 years of the original owner's death.
That 10-year rule can quietly push you into a higher bracket. Inherit a $500,000 traditional IRA and spread the withdrawals evenly, and you add roughly $50,000 of taxable income every year for a decade. Stack that on top of your salary and you may pay a meaningfully higher rate on the entire account.
Spouses get far better treatment. A surviving spouse can roll an inherited IRA into their own IRA and delay required minimum distributions until age 73, the current RMD age set by the IRS. That flexibility is worth tens of thousands compared with the 10-year clock.
This is where planning pays for itself. Jeff Judge has watched heirs default to leaving an inherited IRA untouched for nine years, then drain it in year ten and trigger a brutal tax bill. A smarter approach spreads withdrawals across low-income years. Chesapeake Financial Planners uses the R.U.D.D.E.R. Method™, a six-step planning process of Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine, to map an inherited IRA drawdown against your bracket year by year.
How do you use the years between retirement and RMDs to reduce lifetime taxes?
What Happens When You Sell Inherited Property?
You owe nothing when you inherit property. You may owe capital gains tax when you sell it, but only on appreciation that happens after the date of death, thanks to the step-up in basis.
An example makes it clean. You inherit a house valued at $400,000 on the date of death. Two years later you sell it for $445,000. Your taxable gain is $45,000, not the full sale price. Sell quickly and the gain stays small. Hold for years while the property keeps appreciating, and the eventual tax bill grows with it.
The same logic applies to inherited stocks and funds. Your basis is the date-of-death value, and only growth beyond that point is taxable when you sell.
How Should I Place Investments Across Taxable and Retirement Accounts?
Frequently Asked Questions
Do I have to report an inheritance on my federal tax return?
In most cases, no. An inheritance of cash or property is not reported as income on your federal return. You only report income the inherited assets generate afterward, such as interest, dividends, rent, or distributions from an inherited retirement account. Inherited IRA withdrawals are reported as ordinary income in the year you take them.
Is inherited cash taxed as income?
No. Inherited cash is not taxed as income at the federal level, and most states do not tax it either. The money transfers to you tax-free. The only catch is interest or earnings that cash generates after it becomes yours, which is taxable going forward just like any other interest or dividend income you earn.
How does the 10-year rule work for inherited IRAs?
Under the SECURE Act, most non-spouse beneficiaries must withdraw all funds from an inherited traditional or Roth IRA within 10 years of the original owner's death. Traditional IRA withdrawals are taxed as ordinary income; Roth withdrawals are generally tax-free. Spreading traditional IRA withdrawals across low-income years can reduce the total tax you pay.
Does Maryland tax inheritances?
Yes. Maryland is the only state with both an estate tax and an inheritance tax. The Maryland inheritance tax runs up to 10% for non-exempt beneficiaries, though spouses, children, parents, and siblings are exempt. The Maryland estate tax exemption is $5 million, far below the federal $15 million, so some Maryland estates owe state tax that would never owe federal tax.
Will I owe capital gains tax on an inherited house?
You owe capital gains tax only on appreciation that occurs after the date of death. Because of the step-up in basis, your cost basis resets to the home's fair market value on the day the owner died. If you sell shortly after inheriting, the gain is typically small or zero. Holding the property as it appreciates increases the eventual tax.
A Smarter Way to Handle Your Inheritance
The tax impact of inheriting money this year comes down to what you inherited, not the dollar amount. Cash and most property arrive tax-free, the step-up in basis erases years of built-up gains, and the one place to focus your inheriting money taxes strategy is an inherited retirement account. If you found this helpful, our Inheritance Tax Planning Guide walks through the inherited IRA 10-year rule and state tax rules in depth. Download it at chesapeakefp.com.
Want to go deeper? Our Inherited IRA 10-Year Rule walks through this step by step.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
This information is not intended to be a substitute for specific individualized tax, investment or legal advice. We suggest that you discuss your specific situation with a qualified tax, legal or financial advisor.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
