Will You Pay Tax on an Estate Payout? Here's How it Works in 2026
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If you receive money or property from someone who has passed away, taxes are usually one of the first concerns. The good news is that most people will not owe any federal estate tax in 2026. That tax applies only to very large estates and is paid before heirs receive their share. Still, state taxes and different rules around inheritance can affect how much you ultimately keep. Therefore, it helps to understand how the system works.
At the center of the issue is the estate tax exemption. For 2026, the federal government allows each person to pass on up to $15 million without triggering the estate tax. Because of this high threshold, only a small percentage of estates face federal estate taxes.
How the Federal Estate Tax Works
The federal estate tax is charged on the total value of a person’s assets at death. This can include cash, stocks, real estate, business interests and retirement accounts. If the estate’s total value stays below the exemption limit, no federal estate tax is due.
If the value goes beyond $15 million in 2026, the tax applies only to the amount above that line. The entire estate is not taxed. Rates are progressive and top out at 40 percent on the highest taxable amounts. Recent law changes made the higher exemption permanent but did not change the tax rates themselves.
For families with estates near the limit, this distinction matters. A modest overage does not result in a massive tax bill, but it does require careful calculation and planning.
Why Exemption Is Higher in 2026
The estate tax exemption has increased significantly over the years. Before 2018, it was much lower. A major tax overhaul raised the limit, and recent legislation locked in the higher amount starting in 2026, with adjustments for inflation going forward.
This change provides more certainty for long-term estate planning, especially for business owners and families with valuable property. However, it does not eliminate all estate-related taxes, particularly at the state level.
State Estate Taxes Can Still Reduce Inheritances
Even if no federal estate tax is owed, state estate taxes may still apply. Several states and the District of Columbia impose their own estate taxes, often with much lower exemption levels. In some states, estates valued at around $1 million can trigger state taxes.
The rules vary widely by state, including tax rates and exemptions. Federal law changes do not override these state systems. Where the deceased lived and sometimes where their assets are located determines whether the state estate tax applies.
Because of these differences, two estates of the same size can face very different tax outcomes depending on location.
Estate Tax & Inheritance Tax Are Not the Same
Estate tax and inheritance tax are often used interchangeably, but they are different. An estate tax is paid by the estate before assets are distributed. An inheritance tax is paid by the person who receives the inheritance.
There is no federal inheritance tax. Only a few states still charge one, and the rules differ in each. In many cases, spouses are fully exempt. Some states also exempt children or close relatives, while more distant heirs may owe tax.
Maryland stands out as the only state that imposes both an estate tax and an inheritance tax, making planning especially important for residents there.
What Heirs & Executors Should Watch For
If you are inheriting assets, you usually do not owe federal income tax just for receiving them. The main tax issues happen at the estate level or under state inheritance laws. However, if inherited assets later produce income, such as interest or rent, that income may be taxable.
Executors and personal representatives have additional responsibilities. They may need to file an estate tax return, handle final income tax filings, and obtain a tax identification number for the estate.
Bottom Line
In 2026, the federal estate tax affects only very large estates, thanks to the $15-million exemption. Most inheritances pass to heirs without any federal estate tax burden. State estate and inheritance taxes, however, can still apply at much lower levels and vary widely by location. Knowing the difference between these taxes and understanding which rules apply can help families plan better and avoid unexpected tax bills.