Are Estate Distributions Taxable?

Usually not, but there are some exceptions

Reviewed by Anthony Battle
Fact checked by Ryan Eichler

Practically speaking, the United States no longer has an inheritance tax. Inheritances of cash or property are not taxed as income to the recipient. As of 2024, the estate tax, which the estate itself pays, is levied only on amounts above $13.61 million. The amount for 2025 is $13.99 million.

What’s more, a special provision of the law allows the estate of a surviving spouse to as much as double that exemption. As a result, very few estates or their beneficiaries will owe any tax at all.

Are Executor Fees Taxable?

Yes, executor fees are considered taxable income. Some executors make their services a gift to their families and forego the fee. Others choose to take the fee. The decision is up to the executor.

Key Takeaways

• An inheritance is not subject to income taxes.
• The federal estate tax now applies only to a tiny minority of super-wealthy taxpayers, estimated at about 2,000 a year in total.
• Income from traditional IRAs that are inherited will be taxable when the beneficiary takes distributions.

As of 2024, 17 states have an estate or inheritance tax. Five states—Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania—have only an inheritance tax. However, none of those states taxes inheritances that go to the spouse or children of the deceased. When they are levied, the taxes go up to 16% of the inheritance.

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.

The estate may pay the taxes due or distribute the taxable income to the heirs. In some cases, doing the latter actually saves the beneficiary money, as the estate may be in a higher tax bracket than the individual who is receiving part of the inheritance. The inheritance is recorded on Internal Revenue Service (IRS) Schedule K-1.

When IRAs Are Involved

While beneficiaries don’t owe income tax on money they inherit, if their inheritance includes an individual retirement account (IRA), they will have to take distributions from it over a certain period and, if it is a traditional IRA rather than a Roth, pay income tax on that money. The IRS explains the rules in Publication 590-B.

Why No Estate Tax?

The history of the estate tax in the U.S. has been fraught with controversy. It was often derided by its opponents as a “death tax.”

In less loaded terms, the estate tax was seen as particularly unfair to Americans whose family assets were tied up in property rather than cash in the bank. They would be forced to sell the property to pay the estate tax. This was seen as particularly egregious for family farmers whose wealth was tied up in farmland, equipment, and livestock.

Limiting the Tax

An exemption to the federal estate tax for estates of up to $5 million was put in place in 2010. That exemption has been reaffirmed and the limits have been raised in subsequent legislation passed by Congress. Current law exempts up to $13.61 million in 2024 and $13.99 million in 2025.

Getting Around the Tax

It is estimated that about 2,000 Americans a year are subject to estate taxes under the latest law, and they generally employ accountants who are adept at finding ways to avoid or minimize the estate tax.

One of the more popular methods of avoiding any estate tax is to give away portions of the estate in advance to family members. Another is to create an irrevocable life insurance trust.

Can Beneficiaries Avoid States Estate Taxes If They Live in a State With No Estate Tax?

Estate and inheritance taxes are levied based on the state where the deceased lived – they do not consider the beneficiaries’ state of residence. For example, if you live in Massachusetts (a state with an estate tax) and leave all your assets to a family member in Texas (a state with no estate tax), the estate tax applies to the value of your assets above the exemption amount. In this case, the estate tax would need to be paid first, then any remaining assets would be payable to the beneficiary.

Which States Have the Highest and Lowest Estate Taxes?

As of 2024, Connecticut has the highest estate tax exemption amount at $13.61 million, while Oregon has the lowest at $1 million. In terms of rates, Illinois, Massachusetts, and Rhode Island have the lowest rate range at 0.8%-16%, while Washington and Hawaii have the highest rate range at 10%-20%.

What’s the Difference Between Estate vs. Inheritance Taxes?

An estate tax considers the net value of the deceased’s assets, including cash, property, investments, and any other assets, and levies this tax against the estate itself. Meanwhile, an inheritance tax only considers the portion payable to the beneficiary, and the beneficiary is responsible for paying the tax.

The Bottom Line

Estate taxes have a long and complicated history. Advocates argue that they are a progressive tax that helps fund government programs and only target families most able to pay the tax. In contrast, critics contend that estate taxes unduly penalize hard-working families and often punish certain groups like farmers who have a lot of assets tied up in land values but otherwise little cash or investments.