Most estates owe no federal estate tax because the exemption is large, but some states have their own estate or inheritance taxes with lower thresholds.
Federal estate tax
The federal estate tax applies only to estates above a high exemption amount, which is adjusted over time and can change by law. Estates below it generally owe no federal estate tax. Spouses can often pass assets to each other without tax, and unused exemption can sometimes be transferred to a surviving spouse.
State taxes
- Some states have estate taxes with lower exemption thresholds.
- A few states have inheritance taxes, paid by the person who inherits, with rates that depend on the relationship.
- Many states have neither.
Other taxes to know
- Heirs generally receive inherited assets with a stepped-up basis for income tax, which can reduce capital gains tax when they sell.
- Retirement accounts can create income tax for beneficiaries.
- Gifts during life may use part of the exemption.
Planning
- Estimate the value of your estate, including life insurance and retirement accounts.
- Check your state's tax rules.
- Talk to an estate planning attorney or tax professional.
- Consider trusts or gifts if your estate is near a threshold.
Frequently asked questions
Do I owe tax on an inheritance I receive?
Usually not federal income tax on the inheritance itself, but some states have inheritance tax and retirement account withdrawals are taxable.
Do thresholds change?
Yes. Check the current figures with the IRS or a tax professional.