Wondering what to do with inheritance money to avoid taxes in 2026? Most heirs owe no federal tax at all. The federal estate tax exemption reached $15 million per person this year, or $30 million for married couples, after the One Big Beautiful Bill Act made the higher level permanent. Five states still tax what heirs receive, though, so location and family relationship matter.
No Federal Inheritance Tax Exists
The federal government does not tax inheritances. Only states can impose an inheritance tax, and most do not.
Money or property you inherit generally does not count as federal taxable income. You do not report a $200,000 bequest on your return.
The income your inheritance produces after you receive it works differently. Interest from an inherited savings account, dividends from inherited stock, and rent from an inherited property all count as your taxable income.
Federal Estate Tax Rarely Reaches Heirs
The federal estate tax hits the estate, not the heir. It applies only to the value above the exemption.
For 2026, that exemption is $15 million per individual, up from $13.99 million in 2025. Married couples can shield $30 million. The exemption now adjusts for inflation each year.
Amounts above the exemption face a top rate of 40%.
A surviving spouse can also claim the deceased spouse’s unused exemption. This feature is called portability. The estate must file Form 706 to lock it in, even when no tax is due.
Five States Tax Inheritances Directly
Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania still charge heirs. Iowa ended its tax for deaths on or after January 1, 2025, so Iowa heirs now owe nothing.
The tax follows the deceased person’s home state, not yours. A Florida resident who inherits from a Pennsylvania relative owes Pennsylvania. A Pennsylvania resident who inherits from a Florida parent owes Pennsylvania nothing.
Your relationship to the deceased drives the rate. Spouses usually pay nothing. Children often pay little or nothing. Siblings, nieces, nephews, and friends pay the most.
| State | Who gets the best treatment | Top rate (approx.) |
|---|---|---|
| Kentucky | Spouses, children, parents, grandchildren exempt | 16% |
| Maryland | Close family exempt; other heirs pay a flat rate | 10% |
| Nebraska | Close relatives pay 1% above $100,000 | 15% |
| New Jersey | Spouses, children, grandchildren, parents exempt | 16% |
| Pennsylvania | Spouses exempt; children pay 4.5% | 15% |
Rates and exemptions can change, so confirm the current schedule with your state revenue department.
Twelve States and DC Add an Estate Tax
A separate group of jurisdictions taxes the estate itself. Twelve states and the District of Columbia do this, and their thresholds sit far below the federal level.
- Connecticut: $15 million
- New York: $7.35 million
- Maine: $7.16 million
- Vermont: $5 million
- Massachusetts: $2 million
- Oregon: $1 million
The executor pays these bills before heirs receive anything. Maryland stands alone as the only state with both an estate tax and an inheritance tax.
Use the Stepped-Up Basis Rule
This rule delivers the biggest tax break for most heirs. Inherited assets generally take a new tax basis equal to their fair market value on the date of death.
Picture this. Your mother bought stock for $50,000, and it was worth $400,000 when she died. Your basis becomes $400,000. If you sell for $405,000, you owe capital gains tax on just $5,000.
Gifts during life work differently. A gifted asset keeps the giver’s original basis. Heirs who receive appreciated property at death often save far more than heirs who receive it as a gift.
Inherited property also qualifies for long-term capital gains rates, no matter how soon you sell.
Handle Inherited Retirement Accounts With Care
Traditional IRAs and 401(k)s create the most tax surprises. Every dollar you withdraw counts as ordinary income. Roth accounts differ, because qualified withdrawals generally come out tax-free.
Most non-spouse heirs must empty an inherited account within 10 years of the owner’s death. The IRS finalized the rules, and they apply starting in 2025.
If the owner had already begun required minimum distributions, you must also take annual withdrawals during years one through nine. If the owner died before that point, you can time withdrawals freely, as long as the balance hits zero by the end of year 10.
Eligible designated beneficiaries get more flexibility. That group includes:
- Surviving spouses, who can also roll the account into their own IRA
- Minor children of the owner, until they reach the age of majority (21 under the final rules)
- Disabled or chronically ill people
- Anyone no more than 10 years younger than the owner
Smart heirs avoid cashing out everything in one year. A lump sum can push you into a higher tax bracket. Spreading withdrawals across several years, especially during lower-income years, can shrink the total bill.
Smart Moves That Cut Your Tax Bill
Several practical steps can protect more of what you inherit.
- Check the state first. Find out where the deceased lived and whether that state taxes heirs. Your own state does not matter for this tax.
- Sell stepped-up assets when it suits you. Stocks and real estate that gained value before death often carry little taxable gain after the step-up.
- Consider a qualified disclaimer. You can refuse an inheritance within nine months of the death. The asset then passes to the next beneficiary in line. You cannot direct where it goes, and you cannot accept any benefit first.
- Gift in small amounts. In 2026, you can give $19,000 per recipient without using any lifetime exemption. Married couples can give $38,000. Gifts above that amount require Form 709, though no tax is due until you use up your lifetime exemption.
- Pay tuition and medical bills directly. Payments made straight to a school or medical provider do not count against the annual limit.
- Support charity with the right assets. Charities generally owe no tax on inherited traditional IRA dollars, and several inheritance-tax states exempt charitable gifts.
- Remember life insurance. Proceeds paid to a named beneficiary generally avoid income tax. Pennsylvania and New Jersey also exempt them from inheritance tax.
Mistakes That Cost Heirs Thousands
Heirs most often lose money through haste. A few errors show up again and again.
- Cashing out a traditional IRA in a single year and landing in a higher bracket
- Skipping required annual withdrawals when the owner had already started them
- Ignoring the state where the deceased lived
- Gifting low-basis property during life when holding it until death would have erased the gain
- Spending the money before confirming what tax is due
Documentation matters too. Keep the date-of-death valuation for every asset. A solid record protects your stepped-up basis if the IRS ever asks.
When to Call a Professional
Simple inheritances, such as a cash gift or a modest account from a parent, rarely need complex planning. Larger or more complicated situations do. Call a CPA or estate attorney if you inherit a business, multiple properties, a large retirement account, or any asset from a state with its own transfer tax.
A one-time consultation often costs far less than a single avoidable tax mistake.
The Bottom Line
Knowing what to do with inheritance money to avoid taxes starts with three questions. Where did the deceased live? What type of asset did you receive? How are you related to the person who died?
Those answers show whether you face a state inheritance tax, a retirement account clock, or no tax at all. Most heirs pay nothing federally, and careful timing can trim the rest.
Have you inherited money or property and faced a tax surprise? Share your story in the comments and stay tuned for more practical money guides.