When someone passes away and leaves behind assets, their beneficiaries often face a mix of emotions—grief, gratitude, and sometimes confusion. Once the dust settles from the loss of a loved one, one of the most common questions that arises during estate settlement is: “Do I have to pay taxes on this inheritance?” The answer isn’t a simple yes or no. Whether or not a beneficiary pays taxes depends on a range of factors, including the type of inheritance, state laws, and the nature of the estate itself.

We’ll walk you through the basics of inheritance taxes, how they differ from estate taxes, how state laws play a role, and the tax payment process for those who do need to pay taxes.

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Estate Taxes vs. Inheritance Taxes: Know the Difference

It's important to distinguish between estate taxes and inheritance taxes. While both relate to the transfer of assets after someone’s death, they apply in different ways:

• Estate Tax is levied on the estate itself before any distribution is made to beneficiaries. It is the responsibility of the estate (typically managed by an executor), not the beneficiary.
• Inheritance Tax is levied on the recipient of the inheritance. It is paid by the beneficiary, not the estate.

In the U.S., the federal government only imposes an estate tax, not an inheritance tax. However, some states impose inheritance taxes.

The Federal Estate Tax

As of 2025, the federal estate tax applies only to estates valued over $5 million per individual (this amount was reduced from a higher threshold due to tax law changes). Most Americans will not need to worry about the federal estate tax, since the majority of estates fall below this threshold. When applicable, the executor of the estate will file IRS Form 706 and pay the tax out of the estate’s assets before beneficiaries receive their share.

Do Beneficiaries Pay Taxes on Inheritances?

In most cases, beneficiaries do not pay federal taxes on inheritances. For example:

• Cash gifts are typically not taxable to the recipient.
• Inherited real estate and stocks receive a "step-up in basis," meaning capital gains taxes only apply if you sell the asset later for more than its stepped-up value.
• Retirement accounts like IRAs and 401(k)s are an exception—beneficiaries may owe income taxes on withdrawals, depending on the account type and distribution method.

States That Impose Inheritance Taxes

The following states currently impose inheritance taxes:

1. Kentucky
2. Maryland
3. Nebraska
4. New Jersey
5. Pennsylvania

Each state sets its own rules, exemptions, and tax rates. For instance:

• Spouses are typically exempt.
• Children and other close relatives often pay lower rates—or none at all.
• More distant relatives or non-relatives usually pay higher rates.

For example, in Pennsylvania, inheritance tax rates range from 0% (spouses) to 15% (non-relatives). If you live in—or inherit property from—one of these states, it’s essential to consult a professional.

What About Income Taxes on Inherited Assets?

Here’s where many beneficiaries get confused: some inherited assets can generate taxable income after they’re passed on. Key examples include:

• Traditional IRAs and 401(k)s: These are tax-deferred accounts, so withdrawals are taxed as regular income.
• Inherited annuities: Often subject to income tax on gains.
• Rental properties or businesses: Any income generated after inheritance is taxable.

On the other hand, life insurance proceeds are generally tax-free to the beneficiary (unless the policy was transferred for value or owned by a third party).

How Do You Pay Inheritance or Estate Taxes?

If you’re the beneficiary and an inheritance tax is due in your state:

1. Receive notice: You may receive forms or guidance from the estate’s executor or a state revenue department.
2. File state-specific forms: If you live in one of the five states listed above, or received an inheritance from one of these states, check with your state regarding the specific tax form needed.
3. Pay by deadline: States often have a set period (e.g., 9 months) after the decedent’s death to file and pay. Early payments may qualify for discounts.
4. Get help: A tax professional can help ensure accuracy and avoid penalties.

If you're the executor managing an estate subject to federal estate tax, it’s your responsibility to:

• Value the estate’s assets
• File IRS Form 706
• Pay the tax from estate funds

Tips for Beneficiaries

1. Understand the type of asset you're inheriting and whether it has tax implications.
2. Know your state’s laws, especially if the deceased lived in a state with inheritance tax.
3. Keep records of valuations and communications related to your inheritance.
4. Consult a professional to help you navigate tax filings and minimize liabilities.

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By understanding the difference between estate and inheritance taxes, checking your state’s laws, and being aware of income tax implications, you can better prepare for your role as a beneficiary and avoid unwelcome surprises during an already emotional time.

Talk to the helpful team at Elayne if additional support is needed as you navigate inheritances and other estate settlement matters. 

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