A Rare Case When Taxes Are Due
Estates, like individuals, must file income tax forms. They may owe taxes, too, if the assets in the estate are still earning interest or dividends, for example. If the estate executor has failed to pay income tax prior to distributing the inheritance, the beneficiaries may owe some tax.
Most estimates assume the decedent bears the estate tax, primarily because of data limitations. There is good reason to believe that heirs most often bear the tax in the form of lower inheritances. When the burdens are analyzed this way, individuals inheriting over $1 million are likely to bear most of the estate tax.
Estate taxes and inheritance taxes are often discussed together, but they are different: Inheritance tax is paid by a beneficiary, while estate tax is paid out of the deceased's estate before any remaining money, property or other assets are distributed.
Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate.
Gifts and inheritance Personal income types
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
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.
Federal and state estate taxes are paid from the assets of your estate before the remaining assets can be distributed to your heirs. The executor or the trustee, as applicable, is responsible for filing the required federal and state estate tax returns and ensuring that all taxes are paid from the estate.
Capital gains taxes: These are taxes paid on the appreciation of any assets that an heir inherits through an estate. They are only levied when you sell the assets for gain, not when you inherit.
In general, file and prepare the final individual income tax return of a deceased person the same way you would if the person were alive. Report all income up to the date of death and claim all eligible credits and deductions.
Generally, beneficiaries do not pay income tax on money or property that they inherit, but there are exceptions for retirement accounts, life insurance proceeds, and savings bond interest. Money inherited from a 401(k), 403(b), or IRA is taxable if that money was tax deductible when it was contributed.
Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return.
An estate tax return is required if the gross value of the estate is over a certain threshold. For individuals who die in 2025, the threshold is $13.99 million (up from $13.61 million in 2024). Almost anything belonging to the deceased with a tangible cash value is included in the value of the estate.
The Executor must also pay estate administration expenses, like funeral and burial costs, attorney's fees, and possibly Executor fees. And finally, the executor must pay any taxes due on the deceased's final tax return and on an estate tax return if one is required.
You can name your estate as a beneficiary. Your executor will be responsible for distributing your estate (including your pension benefit) according to the instructions in your will. If you name your estate as your beneficiary and die without a will, the court will appoint someone to administer your estate.
Estates are taxed as separate entities by the IRS so income taxes must be filed for the estate. In some cases, the estate will owe taxes on any income earned through its assets. If the estate pays the appropriate amount in taxes, the beneficiary shouldn't be responsible for taxes.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
Accordingly, the prudent thing for an Executor to do in most cases is to liquidate investments at the earliest opportunity. An Executor who seeks to maximize the investments or otherwise increase the value of the estate does so at his or her own peril if the results turn out badly.
Only the wealthiest estates pay the tax because it is levied only on the portion of an estate's value that exceeds a specified exemption level — $5.49 million per person (effectively $10.98 million per married couple) in 2017.
For example, if you purchased your home 15 years ago for $150,000 and your estate executor sold it for $500,000, your estate would be on the hook for the $350,000 in realized capital gains. At a 15 percent long-term capital gains tax rate, that would be a $52,500 tax bill.
An estate's debts will most likely include taxes, which must be paid even if the estate will not pass through probate. An estate's executor is responsible for paying tax debts. If an estate is wholly composed of a trust and does not go through probate, this responsibility will fall instead to the trustee.
What Is the Estate Tax Exemption? The federal estate tax exclusion exempts from the value of an estate up to $13.61 million in 2024, up from $12.92 million in 2023. 1 Only the value over these thresholds is subject to estate tax.
“Cash is king when it comes to leaving an inheritance,” said Carbone. “It's the simplest asset to deal with in terms of a transfer.”