Many Americans are asking the same crucial question in 2025: do you have to pay taxes on inheritance when you receive money, property, or other assets from a loved one? The answer isn’t a simple yes or no. It depends on several factors — including the size of the estate, federal exemptions, state laws, and the type of assets inherited.
With new tax legislation taking effect this year and proposals in Congress that could reshape the future of inheritance taxation, understanding the rules is more important than ever.
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Understanding Inheritance Taxes in 2025
When someone passes away and leaves behind assets, the government may impose taxes on the transfer of wealth. This can happen at both the federal and state levels. Some taxes apply to the estate before distribution, while others may apply to the recipients after they inherit.
The key variables include:
- Value of the estate (how large the inheritance is)
- Federal estate and gift tax exemptions
- State inheritance or estate tax laws
- Type of assets inherited (cash vs. real estate vs. stocks)
Knowing how these factors interact determines whether taxes apply to your inheritance.
Federal Estate and Gift Tax Rules
Current Federal Exemption
As of 2025, the federal lifetime exemption — the amount that can be passed on without triggering federal estate tax — is $13.99 million per individual. For married couples, that amount is $27.98 million. If the value of an estate is below these limits, no federal estate tax is owed.
Gifts made during a person’s lifetime also count toward this exemption. The annual gift tax exclusion for 2025 is $19,000 per recipient. Gifts under this amount do not affect the lifetime exemption.
Higher Exemption Made Permanent
A major change in 2025 is the permanent extension of higher federal exemptions. Congress passed legislation that sets the exemption at $15 million per individual (and $30 million for couples) starting in 2026, with adjustments for inflation.
This change means fewer families will face federal estate tax in the coming years, reducing uncertainty for estate planning.
Federal Tax Rates on Large Estates
If an estate exceeds the federal exemption, only the amount above the threshold is taxed. The top federal estate tax rate is 40%.
For example:
- Estate value: $18 million
- Exemption: $13.99 million
- Taxable amount: $4.01 million
- Tax owed: 40% of $4.01 million
Heirs do not personally pay this tax — it is paid by the estate before distributions are made.
Proposals to Repeal Federal Estate Tax
In early 2025, a proposal called the Death Tax Repeal Act was introduced in Congress. If passed, it would eliminate federal estate and gift taxes entirely. While not yet law, it highlights how inheritance tax rules may continue to evolve.
State Inheritance and Estate Taxes
Even if you owe no federal tax, state laws can still affect what you receive. Some states have estate taxes, which apply to the estate before distribution. Others have inheritance taxes, which are paid by the heirs themselves.
Key Differences Between State Taxes
- Estate Tax: Paid by the estate before assets are distributed.
- Inheritance Tax: Paid by the person receiving the inheritance, depending on their relationship to the deceased.
State Examples
| State | Type of Tax | Exemption Amount | Top Rate | Key Note |
|---|---|---|---|---|
| Washington | Estate Tax | $2.19 million | 20% | One of the lowest exemptions in the country |
| Kentucky | Inheritance Tax | $500–$1,000 (varies) | 16% | Spouses often exempt, but distant relatives pay more |
| Nebraska | Inheritance Tax | ~$100,000 (varies) | 1–15% | Rate depends on the beneficiary’s relationship |
| Connecticut | Estate Tax | $13.99 million | ~12% | Mirrors federal exemption but applies separately |
Because state rules differ so widely, an inheritance that is tax-free at the federal level might still generate a tax bill at the state level.
Common Scenarios That Affect Inheritance Taxes
To better understand how these rules work in practice, consider some typical scenarios:
- Small Estate
An estate worth $1 million is inherited by children. There is no federal tax, and likely no state tax if the state has high exemptions. - High-Value Estate
An estate worth $20 million is passed to heirs. The first $13.99 million is exempt; the remainder may face federal estate tax at up to 40%. - Inheritance in a State with Taxes
A $500,000 inheritance is received in Kentucky by a niece. While no federal tax applies, state inheritance tax likely does because nieces are not exempt in that state. - Inherited Stocks or Property
You inherit stock worth $100,000. There is no immediate tax on the inheritance itself, but if you later sell the stock, you may owe capital gains tax on any appreciation after the date of inheritance.
Recent Developments in 2025
Permanent Federal Exemption Increase
The permanent increase to $15 million starting in 2026 has stabilized federal inheritance tax planning. Estates now have a clearer path for transfers without worrying about sudden reductions in exemption amounts.
IRS Modernization
The IRS has modernized its gift and estate tax filing systems, making compliance easier for large estates. Electronic filing for gift tax returns is now streamlined, allowing faster processing and fewer delays.
State-Level Adjustments
Several states have adjusted their exemption thresholds in response to federal changes. Some have raised exemptions, while others have maintained lower levels, meaning state taxes may affect more moderate estates.
Ongoing Policy Debates
The proposed repeal of federal estate tax remains a hot political topic. While it has not passed, future legislative changes could dramatically shift the inheritance tax landscape again.
When You Might Actually Pay Tax on an Inheritance
Most people will not pay federal inheritance taxes directly. However, taxes can apply in specific situations:
- The estate exceeds the federal exemption amount.
- You live in a state with inheritance tax.
- You inherit income-producing assets that generate taxable income.
- You sell inherited assets and realize capital gains.
- Lifetime gifts exceeded the annual exclusion and used part of the exemption.
Understanding these scenarios can help you plan for any potential tax liabilities.
Practical Steps for Heirs
If you’re expecting or have received an inheritance in 2025, here are practical steps to consider:
- Check the estate’s value to determine if federal taxes apply.
- Review state laws where the deceased lived and where you live, since both may have tax implications.
- Understand the asset type, as real estate, cash, stocks, and retirement accounts each have different tax consequences.
- Keep documentation of asset values at the time of inheritance for future tax reporting.
- Consult professionals if the estate is large or involves multiple states.
Proper planning can help avoid unnecessary surprises when it comes to taxes.
Key Takeaways
- Whether you have to pay taxes on inheritance depends on federal exemptions, state laws, and the type of assets inherited.
- Most heirs will not pay federal tax due to high exemption levels.
- State taxes can still apply even if the estate is below federal thresholds.
- New 2025 legislation provides stability by permanently raising the exemption starting in 2026.
- Future laws, including possible repeal efforts, may change the landscape again.
FAQ
Q1: Do all heirs pay tax when they inherit money?
No. Most inheritances fall below the federal exemption, and many states do not impose inheritance tax.
Q2: Can you owe taxes later on inherited assets?
Yes. If you inherit stocks, property, or other income-producing assets, you may owe taxes on future earnings or sales.
Q3: Will inheritance taxes be repealed?
There is a proposal to repeal federal estate tax, but it has not passed. The current exemption remains in place.
Disclaimer:
This article is for informational purposes only and reflects tax laws and regulations as of 2025. It should not be considered legal, tax, or financial advice. Readers should consult professionals for personalized guidance.