Is Inheritance Taxable? Tax Rules for Married Couples

Do beneficiaries have to pay taxes on inheritance?

In the vast majority of cases, no. Inheritance is not included in gross income for federal income tax purposes, and the United States does not impose a federal inheritance tax. The responsibility for any federal estate tax falls on the estate itself before assets ever reach heirs.

For married couples, the picture is even more favorable. Spouses are exempt from inheritance tax in all five states that impose one. If your parent, grandparent, or other relative leaves you an inheritance, you won't owe federal income tax on the amount you receive. Whether you owe anything at the state level depends on two things: the state involved and your relationship to the person who passed away.

The concrete takeaway for 2025: if you're married and you receive an inheritance, you almost certainly owe zero inheritance tax. State inheritance tax could apply only if the deceased lived (or owned property) in one of the five taxing states and you fall outside the exempt family categories.

Inheritance tax vs estate tax: what's the difference?

These are two separate taxes that apply at different points and to different people. Estate tax is paid by the estate before any assets are distributed. Inheritance tax is paid by the beneficiary after receiving assets. Confusing them can lead to unnecessary worry or missed planning opportunities.

Federal estate tax in 2025

The 2025 federal estate tax exemption is $13.99 million per individual. Married couples can effectively combine their exemptions through a provision called portability, allowing up to roughly $27.98 million to pass free of federal estate tax. Only the amount above the exemption is taxed, at graduated rates from 18% up to 40%.

Portability works like this: if the first spouse to die doesn't use the full exemption, the surviving spouse can claim the unused portion on top of their own. The executor of the first spouse's estate must file IRS Form 706 to elect portability, even if no tax is owed.

Keep in mind that the current exemption is historically high due to the Tax Cuts and Jobs Act (TCJA). Unless Congress acts, the exemption is scheduled to drop to an estimated $7 million to $8 million per person in 2026.

Which states have inheritance tax in 2025?

Five states impose an inheritance tax as of 2025: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa repealed its inheritance tax effective January 1, 2025. In every one of these states, the tax rate and whether you owe anything depend on your relationship to the deceased.

A few things to note:

• Maryland is the only state with both an estate tax and an inheritance tax. The estate tax exemption there is $5 million, and the inheritance tax rate is a flat 10% for non-exempt beneficiaries.
• State estate taxes exist separately in about 12 states plus D.C. These are paid by the estate, not by heirs, but they can reduce what you ultimately inherit. Thresholds are often far lower than the federal $13.99 million. Oregon's estate tax, for example, kicks in at just $1 million.
• The relevant state is usually where the deceased lived or where real property is located, not where you live.

When inheritance becomes taxable income

The inheritance itself isn't taxable, but income that the inherited asset generates after you receive it is. This distinction trips up many people.

Income from inherited assets

Once you own an inherited bank account, rental property, or investment portfolio, any interest, dividends, or rental income it produces is taxable to you as ordinary income. You report it on your tax return in the year you receive it, just like income from assets you purchased yourself.

Inherited traditional IRA distributions

Traditional IRA assets are a significant exception to the "inheritance isn't taxed" rule. Because contributions to a traditional IRA were made pre-tax, distributions to beneficiaries are taxed as ordinary income when withdrawn. Under the SECURE Act, most non-spouse beneficiaries must empty an inherited IRA within 10 years of the original owner's death. Surviving spouses have more flexibility and can roll the IRA into their own account, but withdrawals will still be taxable.

If you expect to inherit a large traditional IRA, working with a tax advisor on a withdrawal strategy can spread the tax burden across multiple years.

Stepped-up basis on appreciated property

One of the most valuable tax benefits of inheritance is the stepped-up basis. Under IRC Section 1014, the cost basis of inherited property resets to its fair market value on the date of death. If your parent bought a home for $150,000 and it was worth $500,000 at the time of death, your basis is $500,000. If you sell it for $510,000, you'd owe capital gains tax on only $10,000, not $360,000. This step-up applies to stocks, real estate, and other appreciated assets.

This is general information. If you're inheriting a mix of assets (real estate, retirement accounts, brokerage accounts), a tax professional can help you identify which items generate taxable income and which benefit from a basis step-up.

How to keep an inheritance separate and reduce inheritance tax

For married couples, the tax question is only half the picture. The other half is whether the inheritance stays your separate property or gradually becomes marital property. In most states, an inheritance starts as separate property, but it can lose that status if you commingle it with joint accounts or use it for shared expenses without documentation.

Reducing state inheritance tax

If you're likely to inherit from someone in one of the five taxing states, a few strategies can help:

• Relationship class matters most. In all five states, spouses are exempt and immediate family members pay reduced rates or nothing. The biggest tax bills fall on unrelated beneficiaries.
• Lifetime gifting. The deceased can reduce the taxable inheritance by making gifts during their lifetime. The federal annual gift tax exclusion is $19,000 per recipient for 2025 ($38,000 for a married couple giving jointly). Gifts made directly to educational institutions or medical providers for tuition and medical bills are unlimited and don't count against any exclusion.
• Residency planning. Because inheritance tax is generally tied to the decedent's state of residence, relocating before death can change the tax outcome. This is a significant decision and should involve both legal and tax counsel.

As Michael C. Cotugno, Esq., Managing Partner of Neptune Legal, puts it: "For conscious partners, wealth is not merely a collection of assets; it's a powerful tool with the potential for profound purpose." Aligning on how you plan for inherited wealth, whether through a prenup clause, a trust, or both, is part of building that shared clarity.

Step-by-step: planning for an inheritance as a married couple

Use this checklist to organize your approach. Some steps you can handle on your own; others call for a qualified professional.

1. Confirm the decedent's state of residence and property locations. State inheritance and estate taxes are tied to where the deceased lived or where real property sits, not where you live. Check whether any of the five inheritance-tax states apply.
2. Identify your relationship class. Each taxing state groups beneficiaries by relationship (spouse, child, sibling, unrelated). Your class determines your exemption and rate. Spouses are exempt in all five states.
3. Check the federal estate tax threshold. For 2025, estates under $13.99 million per person (roughly $27.98 million for married couples using portability) owe no federal estate tax. If the estate is near or above this line, the executor should work with an estate attorney.
4. Review inherited IRA tax treatment. If you're inheriting a traditional IRA, plan your withdrawal strategy. Surviving spouses can roll the IRA into their own; non-spouse beneficiaries generally must withdraw all funds within 10 years. Each distribution is taxed as ordinary income.
5. Understand the stepped-up basis. For real estate, stocks, and other appreciated assets, confirm the fair market value at the date of death. This becomes your new cost basis and can significantly reduce capital gains if you sell.
6. Decide how to keep inherited assets separate. If you want the inheritance to remain your separate property, avoid depositing it into joint accounts. A prenup inheritance clause established before marriage or a trust can formalize this.
7. File on time. In states with inheritance tax, filings are generally due within nine months of the date of death. Kentucky offers a 5% discount for paying within that window. Missing deadlines can result in penalties and interest.
8. Consult a qualified estate attorney or tax advisor. This is especially important if the inheritance involves property in multiple states, large retirement accounts, or assets close to the federal estate tax exemption. General online research gives you the framework, but a professional can address the specifics of your situation.