Most of us don’t inherit money, property, or a family business very often (if ever!), so it makes sense that most families don’t start planning or asking questions until they’re already in the middle of settling an estate. The problem is that by that point, some planning opportunities may no longer be available.
In addition, what we think we know about inheritance tax is usually what we’ve heard from friends, the internet, or movies. For instance, you’ve probably heard that “the IRS taxes your inheritance” or “you should gift everything before you die to avoid taxes.” You’ve also probably heard people talk about inheritance tax, estate tax, capital gains tax, and gift tax, and you might think all of these could apply to you.
The good news is that these assumptions often aren’t true and that all of these taxes don’t apply in all situations. In reality, many people owe little or no tax when they inherit money, property, or other assets. However, it is true that certain assets can trigger taxes later, but how much you’ll owe depends on what you inherit and what you decide to do with it.
I understand that this topic can be complex and you may be thinking about it at a time when you’re already overwhelmed with grief, so in today’s post, I’ll explain which taxes actually apply to different types of inherited assets and what steps families and business owners can take to protect what their loved one worked so hard to build.
Before we jump in, these are the main types of taxes that may apply to an inheritance:
Quick reference — Taxes that may apply to an inheritance
| Type of Tax | When Is It Paid? | Who Pays? | Example |
|---|---|---|---|
| Inheritance Tax | After assets are inherited | Heir / beneficiary | Child inherits property in a state that has inheritance tax |
| Estate Tax | Before assets are distributed | Estate | Large estate pays taxes before heir inherits the estate |
| Gift Tax | During the gift-giver’s lifetime | Person giving the gift | Parents give child money while parents are alive |
| Capital Gains Tax | When an inherited asset is sold | Heir / beneficiary | Heir sells inherited stocks after they appreciate |
| Income Tax | After inheritance generates income | Heir / beneficiary | Heir inherits a business that keeps generating income |
What is inheritance tax?
Inheritance tax is paid by the person receiving the inheritance and not by the estate. There is no federal inheritance tax.
However, a few states currently impose a state inheritance tax. Those states are: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If the person who passed away lived in a state with inheritance tax or owned property in that state, then the person who receives the inheritance may owe tax to that state.
It’s important to understand that even in the states with inheritance tax, close family members often receive more favorable tax treatment, which means that they pay less tax. Each state has different rules, but a surviving spouse often pays no inheritance tax, and the children of the deceased may receive tax exemptions or a reduced inheritance tax rate.
In other words, most Americans never pay inheritance tax.
What is estate tax?
Estate tax is a tax that is paid by the deceased person’s estate before the estate is distributed to others. There is a federal estate tax. Additionally, 12 states and the District of Columbia also impose a state-level estate tax.
Before I explain anything else about estate tax, what you really need to know in layman’s terms is that most estates do not pay estate tax. This is because the estate isn’t taxed until the taxable value of the estate is higher than a certain threshold amount that is set by the IRS. In 2026, that threshold is $15 million.
Basically, this means that if the “taxable estate” calculation–which I’ll explain next–doesn’t reach $15 million, then the estate doesn’t have to file for or pay an estate tax before making distributions to heirs, charitable organizations, or wherever else the estate will go.
For the federal estate tax, the tax owed is calculated by first determining what is called the “taxable estate.” You calculate this amount by totaling the fair market value of all of the estate’s assets, cash, property, and most other holdings and then subtracting any allowable deductions for things like mortgages, estate administration expenses, and charitable donations.
Then, after the “taxable estate” amount is determined, the estate’s lifetime total for taxable gifts is added and any applicable tax credits are subtracted to get at the final amount. If that amount exceeds the $15 million threshold, then the estate would likely file and pay estate tax.
The federal estate tax rate ranges from 18% to 40%. The rate increases as the taxable estate amount increases.
As for state-level estate tax, the exemption threshold and the tax rate varies greatly. In 2026, the lowest threshold amount ranges from $1 million in Oregon to $15 million in Connecticut. The tax rate, which typically increases as the amount of the estate increases, ranges from .8% to 35%.
What is gift tax, and does it apply to inherited assets?
No, gift tax only applies while someone is alive. The other important note about gift tax is that it applies to the person giving the gift and not the person receiving it.
Also, just like with estate tax, there is a large exemption threshold before gift tax applies, so most people do not have to pay gift tax. If you have more questions about gift tax, take a minute to read my full post about it or watch my short YouTube video on the topic of gifts and taxes.
What is capital gains tax, and does it apply to inherited assets?
Capital gains is often the last type of tax that most people have heard of or have questions about when they are inheriting money. However, this is the tax that is more likely to apply to an inheritance than the other 3 we’ve discussed.
Don’t worry, though, even with capital gains tax, you likely won’t end up owing much, especially not immediately after inheriting assets. Here’s why:
- Capital gains tax typically only applies when you sell your inherited assets,
- Inherited assets generally receive a step-up in basis, which means that the gains are calculated based off the fair market value of the asset on the death date, and
- The long-term capital gains tax rate is usually what is used to assess the tax owed rather than the higher short-term capital gains tax rate.
For example, if you inherit a home from your grandmother, and its fair market value is $200,000 when you inherit it, but you later sell it for $250,000, then you’ll owe capital gains tax on the $50,000 profit. Even if your grandmother paid $100,000 when she purchased it, you only pay capital gains tax on the difference between what you sold it for and what it was worth when you received it (that’s the step-up in basis part).
If I inherit cash, do I pay taxes on it?
Typically, you do not have to pay taxes on cash that you inherit. You also don’t need to report the inheritance as income on your federal tax return.
If I inherit a house or real estate, do I have to pay taxes on it?
If you inherit a property, you’ll generally only pay capital gains tax on the difference between the sales price and the stepped-up basis for the home, which is the fair market value of the property when you received it (see example in the capital gains explanation above).
If I inherit stocks, do I have to pay taxes on them?
If you inherit stocks, you’ll pay capital gains tax on any profit you get from selling the stocks, and that amount is calculated by subtracting the cost basis of the stocks on the day of death from the amount the stocks were sold for.
If I inherit savings bonds, do I have to pay taxes on them?
Savings bonds are a little trickier than cash, real estate, or stocks because the amount of tax you could owe depends on whether or not:
- The bond is matured or is still earning interest,
- The original bondholder paid income tax on the interest during the time they held the bond, and
- You’re able to report the interest on the original bondholder’s final tax return so that the estate is responsible for paying the tax due up to that point.
Because determining how taxes have been paid on earned interest of savings bonds and how they will need to be paid once you inherit them is complex, I recommend you talk to a CPA or financial advisor to discuss your options for reissuing the bonds in your name or paying taxes on the interest that’s already been earned before you cash them out.
If I inherit a business, do I have to pay taxes on it?
This can be a big concern for small business owners who inherit a family business, and it’s something that should be carefully considered as soon as you know you’d like to take over the family business.
Fortunately, when you inherit a business, the business itself usually does not create ordinary income for you. However, if you decide to take over running the business, then the business’ future profits obviously will generate income and income taxes for you.
Additionally, when the family member who owns the business passes away, there are several processes and transfers that need to start as soon as possible before the business can officially be yours, and these things will likely need to happen even if there is a business succession plan in place:
- Business valuation
- Ownership transfer
- Operating agreements
- Payroll responsibilities
- Setting up future income tax payments
- Paying potential estate tax
On the other hand, if you decide to sell the business, capital gains rules may apply.
What strategies can small business owners use to minimize taxes when passing a business down to an heir?
If you are a small business owner and are wondering what you can do now to plan for your business’ future, employees, and legacy after you retire or pass away, then there are lots of things to consider when coming up with a business succession plan that can make you and your loved ones feel prepared.
I recommend you reach out to a CPA to help with business valuation and preparing for tax implications. They can also help recommend an estate planning attorney to prepare the formal paperwork, including a will or trust. If you’re planning to sell your business, they can recommend an experienced business broker to help with that paperwork and process.
Whether you’re the business owner or the heir to a family business, the bottom line is that if you aren’t prepared for what may happen and you aren’t proactive in getting things in writing the right way, then you limit what can be done and what opportunities exist once the owner passes away.
Abridged by Amy
As with all things taxes, good tax planning is the best way to reduce your tax bill. This is true no matter if you’re inheriting assets or thinking about estate and succession planning for yourself or your business.
I recommend that you work with a CPA and business or estate attorney to make sure you understand the ins and outs of the tax rules that will apply to your situation. Remember that in addition to estate tax, gift tax, capital gains tax, and inheritance tax, there may be other taxes like property tax or income tax that could apply depending on the type of inheritance.
Understanding how these taxes and their financial impact fit together before a major life event can preserve more of your family’s wealth for the next generation.
