Do You Have to Pay Taxes on Money Given to You When Someone Dies?

When someone passes away and leaves you money or assets, the question of whether you have to pay taxes on that inheritance depends on several factors. Generally, inherited money is not considered taxable income at the federal level, so you don’t need to report it on your federal tax return. However, there are exceptions, especially when it comes to state-level inheritance taxes or estate taxes. Six states—Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Iowa (until 2025)—impose inheritance taxes that beneficiaries may need to pay. Additionally, any income earned from inherited assets, such as interest or dividends, is taxable. Understanding these distinctions can help you navigate the financial implications of receiving an inheritance.

Inheritance Tax vs. Estate Tax: What’s the Difference?

It’s important to distinguish between inheritance tax and estate tax:

• Estate Tax: Paid by the deceased’s estate before assets are distributed to beneficiaries. The federal estate tax only applies to estates exceeding $13.61 million (as of 2025), and some states also impose their own estate taxes with lower exemption thresholds.
• Inheritance Tax: Paid by the beneficiary after receiving their inheritance. This tax is only imposed by six states and depends on the beneficiary’s relationship to the deceased and the value of the inheritance. Immediate family members often qualify for exemptions or lower rates.

States With Inheritance Taxes

If you inherit money or property from someone who lived in a state with an inheritance tax, you may be responsible for paying it. Here’s an overview:

• Kentucky: Rates range from 4% to 16%, but close relatives like spouses and children are exempt.
• Maryland: Rates go up to 10%, with exemptions for immediate family members.
• Nebraska: Rates range from 1% to 15%, with close relatives receiving higher exemptions.
• New Jersey: Rates range from 11% to 16%, with exemptions for immediate family members up to $25,000 in value.
• Pennsylvania: Rates range from 4.5% to 15%, depending on the beneficiary’s relationship to the deceased.
• Iowa: Currently imposes a tax but will eliminate it entirely starting in 2025.

Taxable Income From Inherited Assets

While inherited money itself isn’t taxable as income, any earnings generated from it are taxable at both federal and state levels:

• Interest or Dividends: If you invest inherited cash or receive dividends from inherited stocks, those earnings must be reported as income.
• Capital Gains Tax: If you sell inherited property or investments that have appreciated in value since the date of death, you may owe capital gains tax on the profit.

How to Minimize Taxes on Inheritance?

Here are some strategies to reduce your tax burden:

1. Understand State Laws: Check if your state imposes an inheritance tax and whether exemptions apply based on your relationship to the deceased.
2. Use Alternate Valuation Dates: Executors can choose a valuation date six months after death if it reduces estate taxes owed.
3. Consult a Tax Professional: A professional can guide you through complex rules and help you identify deductions or exemptions that apply to your situation.

Special Cases: Gifts Before Death

If the deceased gave you money or assets within seven years before their death, some states may include these gifts in their calculations for inheritance or estate taxes under “gifting rules.” Be sure to clarify these details with an advisor.

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