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Inheritance taxes often loom large in heirs' minds, but rarely are they a concern in reality: Only a small handful of states levy a tax on inheritances, so odds are you won’t have to pay one. But if you live in a state that does impose a tax, the specifics of your inheritance situation can dramatically change your bill.
Inheritance tax definition
An inheritance tax is a tax on assets, such as money or a home, that are inherited from someone who died. The person who inherits the assets pays the tax, and rates can vary based on the size of the inheritance as well as the inheritor's relationship to the deceased.
Inheritance tax returns and tax bills are typically due within several months of the decedent's death.
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Is inheritance taxable?
Inheritance taxes are set by the state, so where you live, the specifics of your inheritance and your own tax situation are factors in how much and whether you pay.
Inheritances can be taxable on the state level, particularly if they're passed down to you from someone who is not an immediate family member. The deceased’s spouse is typically exempt, meaning money and items that go to them aren't subject to inheritance tax. Children of the deceased are also sometimes exempt.
» Inherited an IRA? Learn the rules
Is there a federal inheritance tax?
There is no federal inheritance tax. In fact, only six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — impose a tax on inherited assets as of 2024.
In 2021, Iowa passed a bill to begin phasing out its state inheritance tax, eliminating it completely for deaths occurring after January 1, 2025.
Inheritance taxes vs. estate taxes
Inheritance tax and estate tax are two different things. Inheritance tax is what the beneficiary — the person who inherited the wealth — must pay when they receive it. Estate tax, on the other hand, is the amount that’s taken out of someone’s estate upon their death based on the value of the estate. One, both or neither could be a factor when someone dies.
Another key difference: While there is no federal inheritance tax, but there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024, and the estate tax rate ranges from 18% to 40%. Some states also have estate taxes, and they might have much lower exemption thresholds than the IRS. Assets that spouses inherit generally aren't subject to estate tax.
» MORE: Which states have an estate tax?
Because the estate tax and inheritance tax are different, some people can occasionally get hit with a double whammy. Maryland, for example, has an estate tax and an inheritance tax, which means an estate might have to pay the IRS and the state, and then the beneficiaries might have to pay the state again out of what’s left. However, this isn't the norm across the country.
» Planning your estate? Know the difference between wills and trusts
States that have estate taxes, inheritance taxes or both:
» Dive deeper: Establishing state residency to ease your tax burden
Watch out for capital gains taxes
If assets appreciate after you inherit them, you might need to pay capital gains tax if you sell the assets.
The capital gains tax rate is based on, among other things, the profit you make. For example, if your father leaves you a stock portfolio worth $200,000 on the day he died, and you sell it all for $350,000 two years later, you might owe capital gains tax on the $150,000 gain.
Certain types of inheritances might also create taxable income. For example, if you inherit an IRA or 401(k), the distributions you take might be taxable.
States might have their own capital gains tax rules, so it's a good idea to seek qualified advice.
There are strategies to reduce capital gains taxes that could be a consideration.
3 ways to avoid inheritance tax
If you live in a state that imposes inheritance taxes, there are a few ways to minimize the bill on handed-down assets.
Getting help from a qualified tax expert can be key.
Many states don’t tax gifts. Keep in mind that gifts don’t have to be cash — stocks, bonds, cars or other assets count, too.
You can take steps ahead of time to ensure beneficiaries are in the best situation possible. These estate-planning vehicles include living trusts, irrevocable trusts and grantor retained annuity trusts.
» MORE: How the gift tax works and who pays
Some helpful links from the IRS
IRS Publication 559: A guide to help the people in charge of managing the estate of someone who has died.
IRS Publication 525: An overview of what kinds of income are taxable or nontaxable.
Frequently asked questions
Is the capital gains tax on inherited property short-term or long-term?
That depends on whether the recipient held it for longer than one year before selling and the value of the asset at the time of sale. Check out our article on capital gains tax rates to learn more.
What kind of experts should I look to for help with inheritance tax?
Estate planning attorneys, certified public accountants (CPAs) and certified financial planners (CFPs) all may be able to help you find ways to avoid or navigate inheritance tax.
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