While state laws differ for inheritance taxes, an inheritance must exceed a certain threshold to be considered taxable. For federal estate taxes as of 2024, if the total estate is under $13.61 million for an individual or $27.22 million for a married couple, there's no need to worry about estate taxes.
Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.
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.
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.
Many states assess an inheritance tax. That means that you, as the beneficiary, will have to pay taxes when you receive an inheritance. How much you'll be assessed depends on the state you live in, the size of your inheritance, the types of assets included, and your relationship with the deceased.
There is no federal inheritance tax but several states levy one.
Stocks and cash: Inherited cash generally isn't taxable unless the estate exceeds the applicable estate or inheritance taxes. Stocks also aren't taxable unless they are subject to estate or inheritance taxes but could result in capital gains taxes when you sell them.
Annual gift tax exclusion
The gift tax limit is $18,000 in 2024 and $19,000 in 2025. Note that this annual exclusion is per gift recipient. So, you could give away the limit to several different people in a single year and still not have to file a gift tax return and possibly pay the gift tax.
Deposit the money into a safe account
Your first action to take when receiving a lump sum is to deposit the money into an FDIC-insured bank account. This will allow for safekeeping while you consider how to make the best use of your inheritance.
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. Example: You inherit and deposit cash that earns interest income. Include only the interest earned in your gross income, not the inherited cash.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
The IRS allows you to gift up to $18,000 in money or property to an individual each year without having to report it to the IRS (for the tax year 2024). Even if your gifts exceed $18,000, it's still unlikely you'd have to pay taxes unless you've surpassed the lifetime gift tax exclusion ($13.61 million in 2024).
Immediately after receiving an inheritance, you should notify your local Social Security office.
There are four ways you can avoid capital gains tax on an inherited property. You can sell it right away, live there and make it your primary residence, rent it out to tenants, or disclaim the inherited property.
This means that when the beneficiary withdraws those monies from the accounts, the beneficiary will receive a 1099 from the company administering the plan and must report that income on their income tax return (and must pay income taxes on the sum).
Each state has different estate tax laws, but the federal government limits how much estate tax is collected. Any estate worth more than $11.8 million is subject to estate tax, and the amount taken out goes on a sliding scale depending on how much more than $11.8 million the estate is worth.
Any gifts exceeding $18,000 in a year must be reported and contribute to your lifetime exclusion amount. You can gift up to $13.61 million over your lifetime without paying a gift tax on it (as of 2024). The IRS adjusts the annual exclusion and lifetime exclusion amounts every so often.
The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift. However, form 709 is not the only way the IRS will know about a gift.
An inheritance tax is levied on the value of the inheritance received by the beneficiary, and it is paid by the beneficiary. There is no federal inheritance tax. Inherited assets may be taxed for residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Certain types of assets are also exempt, or partially exempt, from inheritance tax. In particular, pension pots are not treated as part of an individual's estate, and agricultural and business property can attract either 50% or 100% relief.
When a house is transferred via inheritance, the value of the house is stepped up to its fair market value at the time it was transferred, according to the IRS. This means that a home purchased many years ago is valued at current market value for capital gains.
Making a will to distribute your assets
Whether leaving assets to a spouse or civil partner, distributing assets to take advantage of tax-free allowances, or making gifts to charity, a valid will could help you to reduce or avoid Inheritance Tax altogether.
As a result, for 2024, a single taxpayer can claim a federal estate and lifetime gift tax exemption of $13.61 million. Couples making joint gifts can double that amount. This exemption has helped affluent families pass along substantial gifts tax-free.
The federal government doesn't have an inheritance tax. As of 2024, six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Generally, the value of the inherited assets has to exceed minimum amount before an inheritance tax is due.