What is inheritance and is it taxable?

An inheritance includes pretty much anything of value that is passed down to you after someone passes away. There are a few different types of taxes that may come into play, but the most common, estate tax, is paid by the estate before you receive anything. An inheritance tax that is paid by a beneficiary is much rarer and only applicable in six states.

What is considered inheritance?

Inheritance encompasses a wide range of assets and possessions passed down to heirs or beneficiaries upon the benefactor’s death. It includes financial assets like cash and investments, real estate, and personal belongings such as jewelry, art, and heirlooms. It can also include retirement accounts like 401(k)s and IRAs, depending on how they are structured.

All of these are put into the deceased person’s estate, and then an executor of the estate deals with the legal responsibilities, like any estate taxes (see below), and distributes the remaining assets as closely as possible to the intentions of the will.

Is inheritance considered income?

No. Inheritance itself is typically not considered income. This means you don't have to report the inheritance as taxable income on your annual tax return. Instead, it's considered a windfall or a transfer of assets.

Estate tax vs. inheritance tax

The two main types of taxes that affect the transfer of wealth after someone passes away are estate tax and inheritance tax. Estate tax is a federal tax, and some states also have an estate tax. It is paid by the estate of the deceased before anything is distributed to heirs. Inheritance tax is paid by the beneficiary after receiving their inheritance, and only on the amount they receive. Inheritance tax is imposed only in six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Below you’ll find a quick comparison between estate and inheritance tax, and later in this article we’ll go into more depth on each.

How much can you inherit without paying taxes?

Neither estate taxes nor inheritance taxes affect a vast majority of Americans. While state laws differ for inheritance taxes, an inheritance must exceed a certain threshold to be considered taxable. For federal estate taxes as of 2024, if the total estate is under $13.61 million for an individual or $27.22 million for a married couple, there’s no need to worry about estate taxes.¹

Please note that tax laws can change, and exemption amounts will be adjusted for inflation or through legislative changes. It's essential to consult tax advisor for the most up-to-date information.

Lifetime gift tax exemption

One common method of limiting inheritance and estate taxes is to take advantage of the yearly gift tax exclusion and lifetime gift tax exemption. Each year, you can give away a certain amount tax free ($18,000 in 2024). The portion of the lifetime gift tax exemption is applied to any amount you gift over that. The total is conveniently set to the same amount as the estate tax threshold at $13.61 million for an individual. However, every gift you give applying the lifetime exemption reduces the estate tax threshold, so you can think of them as one and the same thing.

What is inheritance tax?

Inheritance tax is paid by individual beneficiaries based on the amount they receive from someone’s estate. You only pay tax on what you get, not the total amount left behind. Very few people have to worry about inheritance tax, because it has a threshold the inheritance must exceed before going into effect and it applies in only six states:

• Iowa
• Kentucky
•  Maryland
• Nebraska
• New Jersey
• Pennsylvania

For example, as of 2024, the minimum threshold in New Jersey is $25,000. If the total value of your inheritance is less than that, no taxes are applied. Anything between $25,000 and $1.1 million is taxed at 11%, and the percentage rises from there for different brackets.² In many cases, certain family members do not have to worry about inheritance tax. Spouses are almost always exempt from paying it. And in some states, immediate family, such as parents or children, are also exempt. These laws are subject to change, so as always, consult your state’s current tax laws and your tax advisor for the most up-to-date information.

What is estate tax?

Often when people refer to inheritance taxes, “transfer taxes,” or “death taxes,” what they are really talking about is federal estate tax. It is imposed by the federal government on the transfer of large estates after a person’s death, and is based on the total value of the assets and property before anything is distributed to heirs or beneficiaries.

The estate tax threshold is set at $13.61 million for 2024. That number is reduced by any lifetime gift tax exemptions you’ve used. If the estate is under this number, no taxes are due. Anything above $13.61 million is taxed at a 40% rate. You can find information on the exact rates on the IRS.gov Form 706 Instructions page.

In addition to federal taxes, there are also estate taxes in 12 states: Connecticut, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington, plus Washington, D.C. The rules for these states vary, so check your individual state for current information.

Estate planning can help you limit or avoid taxes

There are many strategies that can help you reduce or eliminate the tax burden when transferring wealth from one generation to the next. If you have high net worth, it’s important to discuss your tax obligations and options with a financial and tax professional. With proper estate planning, you can likely take advantage of one or more opportunities to lower or avoid estate and inheritance taxes, including:

• Revocable and irrevocable trusts to distribute wealth
• Strategic use of life insurance benefits
• Gifting assets while still alive
• Moving assets to more favorable tax environments
• Charitable giving

Inheritance Tax FAQs

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This article is for your general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

¹“Estate Tax,” IRS.gov, Oct 2023.

²“New Jersey Inheritance and Estate Tax General Information,” nj.gov, August 2022.