In Indiana, you can inherit an unlimited amount without owing any state tax on the transfer, and federal estate tax only applies to estates worth more than $15 million per person ($30 million for a married couple). So the honest answer to how much you can inherit without paying taxes in Indiana is: for almost everyone, all of it. The catches are not transfer taxes but income tax on inherited retirement accounts, capital gains if you later sell inherited property for more than it was worth on the date of death, and Medicaid estate recovery if the person who died received long-term care benefits.
Indiana Charges No Inheritance or Estate Tax
Indiana repealed its inheritance tax effective January 1, 2013, and eliminated its estate tax and generation-skipping transfer tax at the same time.1Indiana Department of Revenue. Repeal of the Inheritance Tax, Estate Tax, and Generation Skipping Transfer Tax The Department of Revenue has retired the old forms and confirmed that no inheritance tax return should be filed for any Indiana death.2Indiana Department of Revenue. Inheritance Tax Information
Your relationship to the person who died does not matter. Spouse, child, cousin, neighbor, favorite bartender — Indiana treats the transfer the same way, which is to say it does not tax it at all. The full value passes to you as far as the state is concerned.
The Federal Estate Tax Only Touches Very Large Estates
The one transfer tax that could still reach an Indiana inheritance is the federal estate tax. For deaths in 2026, the basic exclusion amount is $15 million per individual, and a married couple can shield up to $30 million.3Internal Revenue Service. What’s New – Estate and Gift Tax The One Big Beautiful Bill Act, signed on July 4, 2025, made that higher exemption permanent, and it will be adjusted for inflation in later years.4Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
Only the portion of an estate above the exemption is taxed, at rates up to 40 percent. And the estate pays it, not you. As a beneficiary, you will never receive a bill from the IRS for estate tax; the executor settles that obligation before distributions go out. What it means in practice is that the amount reaching heirs is smaller when an estate crosses the threshold. Below the threshold, no federal estate tax applies.
Inherited Retirement Accounts Are Taxed as Income When You Withdraw
This is where most Indiana heirs actually pay tax. The transfer of an inherited traditional IRA or 401(k) is not taxed, but every dollar you withdraw is treated as ordinary income. That means federal income tax at your regular bracket plus Indiana’s flat 2.95 percent state income tax on the distribution.5Indiana Department of Revenue. How to Compute Withholding for State and County Income Tax
Under the SECURE Act, most non-spouse beneficiaries must empty the entire inherited account by the end of the tenth year after the original owner’s death.6Internal Revenue Service. Retirement Topics – Beneficiary You can pull the money out any way you like inside that window — all at once, evenly across ten years, or lumpily — as long as the balance hits zero by the deadline. Spreading withdrawals usually keeps you out of a higher tax bracket than a single large distribution would.
A few beneficiaries are exempt from the ten-year rule and can stretch distributions over their own life expectancy:
- A surviving spouse, who can also roll the account into their own IRA
- A minor child of the account owner (the ten-year clock starts when the child reaches the age of majority)
- A disabled individual as defined under federal tax law
- A chronically ill individual certified by a licensed health-care practitioner
- A beneficiary no more than ten years younger than the deceased account owner
Everyone else — adult children, siblings, friends, most trusts — is on the ten-year clock. Inherited Roth IRAs follow the same ten-year withdrawal schedule for non-spouse beneficiaries, but qualified Roth distributions come out tax-free because the original contributions were made with after-tax dollars.
Selling Inherited Property: Stepped-Up Basis Wipes Out Prior Gains
If you inherit real estate, stocks, or other investments, your tax basis resets to the fair market value on the date the owner died. All appreciation that happened during the previous owner’s lifetime becomes invisible for tax purposes.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Say a parent bought a home for $80,000 and it was worth $300,000 the day they died. Your basis is $300,000. Sell it that year for $300,000 and you owe no capital gains tax. Hold it two years and sell for $325,000, and only the $25,000 of post-death appreciation is taxable. When you do sell, report the transaction on Form 8949 and enter “INHERITED” as the acquisition date.8Internal Revenue Service. Instructions for Form 8949
This is a real advantage over receiving property as a gift while the owner was alive, because a lifetime gift carries the giver’s original basis with it.
Life Insurance Payouts Are Not Taxed
Life insurance proceeds paid to a named beneficiary are generally not taxable income, and you do not report the payout on your federal or Indiana return.9Internal Revenue Service. Life Insurance and Disability Insurance Proceeds If the insurer holds the money for a period and it earns interest before being paid out, the interest portion is taxable, but the underlying death benefit is not.
One narrow exception: if a policy was transferred to you in exchange for payment, rather than as a gift or through a standard beneficiary designation, the tax-free amount may be limited to what you paid plus any premiums you added. This mostly shows up in business arrangements, not typical family inheritances.
Medicaid Estate Recovery Can Take More Than Any Tax Would
The biggest real-world threat to an Indiana inheritance is not a tax at all. If the person who died received Medicaid-funded long-term care, Indiana’s Family and Social Services Administration can file a claim against the estate to recover those costs. Recovery reaches broadly and includes assets that pass outside probate: jointly held real estate, payable-on-death bank accounts, funds in revocable trusts, and certain annuities.10Indiana Family and Social Services Administration. Medicaid Estate Recovery
Federal law blocks recovery while any of these people are still living:
- A surviving spouse
- A child under age 21
- A child of any age who is blind or disabled
Once none of those protected individuals is alive, the state can pursue the estate.11Medicaid.gov. Estate Recovery If you know or suspect the person who died received Medicaid benefits, talk to a probate attorney before distributing anything. Heirs and executors who hand out assets ahead of a valid claim can end up personally on the hook.
Inheriting From Someone Who Lived in Another State
Indiana’s zero-tax status protects transfers from Indiana residents. It does not protect you from another state’s inheritance tax. A handful of states — including Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — still tax inheritances, and those taxes are generally based on where the deceased person lived, not where the beneficiary lives. If you are named in the will of someone who lived in one of those states, check that state’s rules before assuming the transfer is tax-free.