Understanding the financial implications of an inheritance is crucial for beneficiaries aiming to maximize their benefits. While inheriting money may seem straightforward, tax liabilities can complicate matters significantly.
This article explores the tax thresholds and types of assets that might be subject to taxation to help beneficiaries navigate the process effectively.
Estate and Inheritance Tax Basics
Estate and inheritance taxes are distinct and impact the transfer of wealth differently. Estate tax is levied on the deceased’s total estate value before distribution, while inheritance tax is imposed on the recipients. At the federal level, the estate tax applies only to estates exceeding a specific threshold, adjusted annually for inflation. For decedents dying in 2025, the federal estate tax basic exclusion amount is $13,990,000 per individual. 1Internal Revenue Service. Internal Revenue Bulletin 2024-45
Inheritance tax, on the other hand, is determined at the state level, with only a few states imposing it. For example, Iowa no longer imposes an inheritance tax for deaths occurring on or after January 1, 2025, while Kentucky continues to impose an inheritance tax with class-based exemptions and rates. 2Iowa Legislature. SF 619 (2021), Division V — Inheritance Tax Repeal Effective Jan. 1, 2025
Applicable Thresholds for Tax Liability
Tax liability thresholds vary widely between federal and state regulations. While the federal estate tax exemption offers significant relief, some states impose their own estate or inheritance taxes with much lower exemption thresholds. For instance, Massachusetts requires an estate tax return for estates over $2,000,000 for dates of death on or after January 1, 2023. 3Massachusetts Department of Revenue. Massachusetts Estate Tax Guide
Oregon imposes an estate transfer tax when a decedent’s gross estate exceeds $1,000,000. 4Oregon Department of Revenue. Revenue Streams — Estate Transfer Tax
Inheritance taxes also depend on the beneficiary’s relationship to the deceased. In New Jersey, Class A beneficiaries (such as spouses and direct descendants) are exempt, while other beneficiary classes face graduated rates ranging from 11% to 16%. 5State of New Jersey, Division of Taxation. Inheritance Tax Rates
Types of Assets That May Be Taxed
An estate’s diverse holdings can significantly impact tax liability. Real estate, often a substantial portion of an estate, is included in the overall valuation and may push the estate above exemption thresholds. Some states also impose property taxes, complicating matters further for beneficiaries.
Financial assets, including stocks, bonds, and mutual funds, are subject to valuation at the time of the decedent’s passing. Beneficiaries may encounter capital gains tax implications if these assets are sold, though the stepped-up basis rule generally sets the basis of inherited property to its fair market value on the decedent’s date of death (or alternate valuation date if elected). 6Internal Revenue Service. Publication 551, Basis of Assets
Personal property, such as valuable collections, jewelry, and vehicles, can also be taxed. Accurate appraisal of these items is critical to determine their fair market value. Undervaluation can lead to penalties, while overvaluation may unnecessarily increase tax liability. Beneficiaries must approach these intricacies with care to make informed decisions.