An inheritance can offer helpful financial support, but it may also come with tax considerations. The taxes you might owe depend on the type of asset, federal and state laws, and the size of the inheritance. Most estates are not subject to federal estate tax because of the high exemption limit, but some states have their own rules, and certain assets like retirement accounts may be taxed as income.
A financial advisor who specializes in estate planning can help you understand how tax laws apply to your inheritance and develop a strategy to protect it.
Federal Taxes
At the federal level, heirs typically do not pay taxes directly on what they inherit. Instead, the federal estate tax applies to the estate itself before it distributes assets to beneficiaries. For 2025, the Congress sets the federal estate tax exemption at $13.99 million per individual, or $27.98 million for married couples. This means estates valued below those thresholds owe no federal estate tax. Only a small percentage of estates, typically less than 1%, are large enough to trigger the federal estate tax. However, the IRS taxes amounts above the exemption at rates up to 40%.
It’s also important to understand the step-up in basis rule. When you inherit assets such as stocks or real estate, the value of those assets is “stepped up” to their fair market value at the time of the owner’s death. This can significantly reduce the capital gains tax owed if you later sell the assets.
However, not all inherited assets receive a step-up. For example, pre-tax retirement accounts like traditional IRAs or 401(k)s maintain their tax-deferred status. However, withdrawals by beneficiaries are taxed as ordinary income.
While most states do not impose inheritance or estate taxes, there are exceptions: If you inherit property located in a state that imposes estate or inheritance taxes, those taxes may apply even if you reside elsewhere. This is why it’s so important to understand both the decedent’s state tax laws and your own. The relationship between the deceased and the heir can impact tax liability. In most cases, spousal inheritances receive the most favorable tax treatment. Under federal law, assets that pass to a surviving spouse are generally tax-exempt. This unlimited marital deduction allows spouses to transfer wealth without triggering federal estate taxes, a key benefit for married couples engaging in estate planning. However, the situation becomes more complex for other heirs. Children, siblings and unrelated beneficiaries may face state-level inheritance taxes, depending on the laws in their jurisdiction. Some states exempt close family members, like children or parents, while others impose taxes on all non-spousal heirs. Another important factor is the role of beneficiary designations. Assets like retirement accounts, life insurance policies and payable-on-death (POD) bank accounts pass directly to the named beneficiaries, often bypassing probate entirely. These designations can override instructions in a will or trust, making it crucial to keep them updated to safeguard the owner’s wishes and to avoid unintended tax consequences for heirs. In addition to estate and inheritance taxes, certain inherited assets may trigger other taxes: While taxes on inheritances can be significant, several strategies may help reduce or eliminate the tax burden: How much you can inherit without paying taxes depends on several factors, including the size of the estate, the type of assets received and applicable federal and state tax laws. While most heirs avoid federal estate taxes thanks to the high exemption limit, state taxes and income taxes on certain inherited assets can still apply. Photo credit: ©iStock.com/triloks, ©iStock.com/courtneyk, ©iStock.com/courtneyk Read the full article hereState Taxes
Special Considerations for Spouses and Heirs
Other Considerations
Strategies for Reducing Inheritance Taxes
Bottom Line
Estate Planning Tips
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