Taxes on inherited assets are among the most misunderstood topics in estate planning. Many people fear they'll owe significant taxes on an inheritance — while others overlook taxes that do apply. Here's a clear-eyed look at what taxes actually apply to estates and inheritances in the United States.
The Three Types of Taxes to Understand
1. Federal Estate Tax
The federal estate tax is imposed on the estate itself — not on the heirs — before assets are distributed. In 2024, the federal estate tax exemption is $13.61 million per individual ($27.22 million for married couples with proper planning). This means only estates worth more than $13.61 million owe any federal estate tax at all. Fewer than 1% of estates are subject to it.
Important warning: The Tax Cuts and Jobs Act provisions that doubled the exemption in 2017 are currently set to sunset after December 31, 2025, potentially reducing the exemption to approximately $7 million per person (adjusted for inflation). If you have a large estate, work with a tax advisor before this deadline.
2. State Estate and Inheritance Taxes
Separate from the federal estate tax, many states impose their own estate or inheritance taxes:
- State estate taxes: Imposed on the estate (like the federal tax). States with estate taxes include Massachusetts, Oregon, Washington, Illinois, and others — with exemptions typically much lower than the federal threshold (sometimes as low as $1 million).
- State inheritance taxes: Imposed on the heir (unlike estate taxes). Currently imposed by Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rate often depends on the heir's relationship to the deceased — spouses and children often pay lower rates or nothing at all.
Check your state's current rules — they change frequently.
3. Capital Gains Tax on Inherited Assets
This is where many heirs get surprised. When you sell inherited assets, you may owe capital gains tax — but not on the full value. Inherited assets receive a "stepped-up basis": the cost basis is reset to the asset's fair market value on the date of the original owner's death.
Example: Your parent bought stock for $10,000. It's worth $100,000 at their death. You inherit it. If you sell it for $100,000, you owe no capital gains tax (the basis was stepped up to $100,000). If you later sell it for $120,000, you owe capital gains tax on $20,000 (the gain above the stepped-up basis).
Exceptions: retirement accounts (IRA, 401k) do NOT get a stepped-up basis — distributions are fully taxable as ordinary income. See our guide to retirement account inheritance.
What Heirs Actually Owe (For Most People)
For a typical inheritance:
- No federal estate tax (estate is under $13.6 million threshold)
- Possibly state estate or inheritance tax (depends on state; often exempt for spouses and children)
- No income tax on inherited property itself (inheritance is not income)
- Capital gains tax potentially owed when you sell inherited assets — but only on gains above the stepped-up basis
- Ordinary income tax on retirement account distributions (traditional IRA/401k)
Planning Opportunities
- For large estates: gifts during lifetime (up to the annual gift exclusion of $18,000 per recipient in 2024) can reduce the taxable estate without using the lifetime exemption
- Roth conversions can shift retirement account tax burden from heirs to the original owner, potentially at a lower rate
- Charitable giving can reduce taxable estate while accomplishing philanthropic goals
For the complete picture of probate and inheritance, see our complete guide to probate and inheritance. For receiving an inheritance, see our guide on what to do when you receive an inheritance.