Tax Guide for Inherited Assets: What You Owe and What You Do Not

Inheritance vs Estate Tax

The US does not have a federal inheritance tax. The estate pays estate tax before assets are distributed. Most beneficiaries owe no federal tax on inherited assets. However, six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Stepped-Up Basis

The most important tax benefit for inherited assets is the stepped-up cost basis. When you inherit an asset, your cost basis is the fair market value on the date of death, not what the original owner paid.

Example: Your parent bought stock for $10,000 that was worth $100,000 at death. Your basis is $100,000. If you sell for $105,000, your capital gain is only $5,000.

Inherited Retirement Accounts

Spouse Beneficiary

Can roll over to their own IRA, treat it as their own, and delay RMDs until age 73.

Non-Spouse Beneficiary (SECURE Act)

Most non-spouse beneficiaries must withdraw the entire balance within 10 years. Annual RMDs may be required during the 10-year period. Withdrawals from traditional accounts are taxed as ordinary income.

Inherited Roth IRAs

Must be emptied within 10 years for non-spouse beneficiaries but withdrawals are tax-free.

Estate Tax Threshold

The 2025 federal estate tax exemption is approximately $13.99 million per individual ($27.98 million for married couples). Only estates exceeding this threshold owe federal estate tax, at rates up to 40%.

Strategies for Beneficiaries

Do not rush to sell inherited assets with a stepped-up basis

Spread retirement account withdrawals across the 10-year period to manage tax brackets

Consider Roth conversions of inherited traditional IRA funds in low-income years

Consult a tax professional for large or complex inheritances

Taxation.ai helps beneficiaries calculate the tax impact of inherited assets and plan optimal withdrawal strategies.