An inheritance tax applies to the gifts and bequests a taxpayer receives. Unlike estate and gift taxes, a progressive inheritance tax gives donors an incentive to spread their wealth more broadly. Recipients can claim an exemption and take advantage of graduated tax rates, thus reducing the effective tax rate. Currently, the United States has no federal inheritance tax, but several states do.
While donors or their estates are legally obliged to remit wealth transfer taxes, evidence suggests that all or most of the economic burden falls on recipients, who receive a smaller after-tax gift or inheritance than they would without the tax. However, an individual recipient’s burden varies depending on whether the tax is an inheritance tax or an estate and gift tax.
Inheritance taxes come in three principal forms:
1. An annual accessions tax applies to the gifts and bequests a person receives in a given year.
2. A lifetime accessions tax applies to the amount an individual receives by gift or bequest over a lifetime.
3. An inclusion tax counts gifts and bequests as income and taxes them as such.
Thus, the tax rate depends on the size of the gift or bequest, as well as on the recipient’s other income. An inclusion tax could be combined with either of the other two types of inheritance taxes into a single tax that takes advantage of the strengths of each.
Most countries rely on inheritance taxes rather than on estate and gift taxes, including more than half of the 36 countries in the Organisation for Economic Co-Operation and Development (OECD). Only two (besides the United States) have estate taxes. The past several decades have seen a shift away from estate taxes among various countries: Australia, Canada, and New Zealand repealed their estate taxes, and Ireland replaced its estate tax with an inheritance tax. More than half of OECD countries also tax gifts, most through a specific annual gift tax but a few include gifts in income subject to income taxes.
Some analysts argue that inheritance taxes are simpler to administer than estate taxes because they curtail strategies used to avoid estate taxes, such as moving assets into complicated trusts that falsely suggest a decedent’s estate will go to a person or entity exempt from the tax. Others argue that estate taxes are simpler because they require less record keeping.
Updated January 2024
Further Reading
Ault, Hugh J., and Brian J. Arnold. 2004. Comparative Income Taxation: A Structural Analysis, 2nd ed. The Hague, Netherlands: Kluwer Law International.
Batchelder, Lily L. 2008. “Taxing Privilege More Effectively: Replacing the Estate Tax with an Inheritance Tax.” In Path to Prosperity: Hamilton Project Ideas on Income Security, Education, and Taxes, edited by Jason Furman and Jason Bordoff, 345–83. Washington, DC: Brookings Institution Press.
Batchelder, Lily L. 2009. “What Should Society Expect from Heirs? A Proposal for a Comprehensive Inheritance Tax.” Tax Law Review 63 (1): 1–112.
Batchelder, Lily L. 2020. “Leveling the Playing Field Between Inherited Income and Income From Work Through an Inheritance Tax.” In Emily Moss, Ryan Nunn, and Jay Shambaugh, editors. Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue. Washington, DC: Brookings Institution.
Ernst and Young (EY). 2019. Worldwide Estate and Inheritance Tax Guide: 2019. February 2019.
European Commission and Ernst and Young (EY). 2014. Cross-Country Review of Taxes on Wealth and Transfers of Wealth. October 2014.
Joint Committee on Taxation. 2008. "Description and Analysis of Alternative Wealth Transfer Tax Systems." JCX-22-08. Washington DC.
FAQs
Inheritance tax is a state-level tax that beneficiaries pay when they inherit assets from someone who has died. It may be levied on property, investments and/or money that's left to heirs. Spouses are typically exempt from inheritance tax, as are some other “close” relatives.
What is the inheritance tax? ›
An inheritance tax is levied on the assets from a deceased person's estate that are received by an individual. The person who receives the assets is responsible for paying the tax. The federal government doesn't have an inheritance tax.
What is inheritance tax quizlet? ›
Inheritance Tax. A tax collected on the property left by a deceased person in some states. Internal Revenue Service (IRS) Government agency that collects taxes for the U.S. government. Intestate.
What is a 100% inheritance tax? ›
To be clear, the 100% tax not an actual tax by the federal or a state government. Rather, it is loss that occurs when a child, grandchild, or other loved one is completely cut off from inheriting family assets.
How much can you inherit without paying federal taxes? ›
In 2024, the first $13,610,000 of an estate is exempt from taxes, up from $12,920,000 in 2023. Estate taxes are based on the size of the estate. It's a progressive tax, just like our federal income tax. That means that the larger the estate, the higher the tax rate it is subject to.
Do I need to report inheritance money to the IRS? ›
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
Do you have to declare inheritance? ›
Do you need to declare inheritance money? No. Any tax due will normally be taken out of the deceased's estate, and the executor will usually take care of it.
What is another type of inheritance tax? ›
Capital Gains Tax
Capital gains tax only comes into play if you decide to sell any part of your inheritance. Fortunately, capital gains tax isn't as brutal as income tax, and is based on the asset's current market value.
What is a tax based on the inheritance one receives called? ›
Inheritance tax, also known as death tax or federal estate tax is an important tax talk you'll run into if certain personal property passes down to you.
Why is inheritance tax progressive? ›
Unlike estate and gift taxes, a progressive inheritance tax gives donors an incentive to spread their wealth more broadly. Recipients can claim an exemption and take advantage of graduated tax rates, thus reducing the effective tax rate.
3 ways to avoid inheritance tax
- Getting help from a qualified tax expert can be key.
- Many states don't tax gifts. Keep in mind that gifts don't have to be cash — stocks, bonds, cars or other assets count, too.
- You can take steps ahead of time to ensure beneficiaries are in the best situation possible.
There is no federal inheritance tax. Inherited assets may be taxed for residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Whether you may pay inheritance tax depends on the amount of the inheritance, your relationship to the decedent, and the state in which the decedent lived.
What is the highest inheritance tax? ›
Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. rate in the OECD at 40 percent; the world's highest rate, 55 percent, is in Japan, followed by South Korea (50 percent) and France (45 percent).
Does inheritance count as income? ›
Inheritances are not considered income for federal tax purposes, whether the individual inherits cash, investments or property.
Do you have to pay taxes on money received as a beneficiary? ›
Some states have inheritance taxes, but California is not one. However, it's essential to be aware that even though there is no inheritance tax in California, there may still be federal estate tax to consider.
How does IRS find out about inheritance? ›
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
What is the difference between estate tax and inheritance tax? ›
An estate tax is levied on the estate of the deceased while an inheritance tax is levied on the heirs of the deceased. Only 17 states and the District of Columbia currently levy an estate or inheritance tax.
What happens when you inherit money? ›
Typically, the estate will pay any estate tax owed, with the beneficiaries receiving assets from the estate free of income taxes (see exception for retirement assets in the chart below). As a beneficiary, if you later sell or earn income from inherited assets, there may be income tax consequences.
Can I give my child $100,000? ›
Can my parents give me $100,000? Your parents can each give you up to $17,000 each in 2023 and it isn't taxed. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit of $12.9 million.
