Many taxpayers confuse estate tax with inheritance tax. While estate tax is paid by the decedent's estate before assets are distributed, inheritance tax is paid by the beneficiary receiving the wealth. At the federal level, there is no inheritance tax, but several states impose their own taxes.
State-Level Inheritance Taxes
As of 2026, only a handful of states impose inheritance taxes. The tax rate and exemption limits depend heavily on the beneficiary's relationship to the decedent. Surviving spouses are always exempt, while distant relatives or non-relatives face the highest tax rates.
Inherited Retirement Accounts and Basis Step-Up
When you inherit standard property (such as real estate or stocks), the asset's tax basis is 'stepped up' to its fair market value on the date of the decedent's death, eliminating capital gains tax on prior appreciation. However, inherited traditional IRAs and 401(k)s do not qualify for basis step-up, and distributions are taxed as ordinary income to the beneficiary.