Inheritance Tax vs. Estate Tax: Basic Differences

When someone dies, families often hear the words "estate tax" and "inheritance tax" used as if they mean the same thing. They do not. The two taxes look at a transfer from different sides, and they are handled by different governments. This guide explains the basic difference in plain language. It does not list rates or amounts, because those change and depend on where you live and when the person died.

The short version

• An estate tax looks at the property of the person who died, taken as a whole. The estate pays it, before property is passed on.
• An inheritance tax looks at what each person receives. Where it exists, it is generally charged to the person who inherits, and it may depend on how closely that person was related to the one who died.

The federal government has an estate tax. It does not have an inheritance tax. Some states have an estate tax, some have an inheritance tax, and many have neither. Your state's rules matter as much as federal rules.

How the federal estate tax works

The IRS describes the estate tax as a tax on your right to transfer property at your death. It starts with an accounting of everything the person owned or had certain interests in at the date of death. The IRS says this can include cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. The total, measured at fair market value rather than what was paid, is called the "gross estate."

From there, certain deductions are allowed to reach the "taxable estate." According to the IRS, these may include mortgages and other debts, estate administration expenses, property that passes to a surviving spouse, and property that goes to qualified charities. Lifetime taxable gifts are then added back, the tax is computed, and the result is reduced by an available credit.

The IRS notes that most relatively simple estates do not need to file a federal estate tax return. A return is required only when the estate is above a filing threshold set for the year of death. The IRS posts the current and past thresholds on its estate tax FAQ page.

Spouses and the unused exclusion

The IRS explains that the estate of a person survived by a spouse may elect to pass the unused part of the exemption to the surviving spouse. This is called the portability election. The IRS says this election is made on a timely filed estate tax return, even if the estate would not otherwise have to file. Families sometimes miss this because they think "no tax, no return." Ask about it early.

The IRS says the estate tax return is due nine months after the date of death, and an extension of time to file may be requested.

How an inheritance tax is different

An inheritance tax is a state tax, in the states that have one. Instead of looking at the total estate, it looks at each heir and what that heir receives. Rules often treat close family members differently from more distant relatives or unrelated people. Some close relatives, such as a surviving spouse, may be exempt under a state's rules.

Because inheritance tax is set state by state, you need to check the law of the state that applies. That may be the state where the person lived, and in some cases the state where property such as real estate is located. USAGov's page on state and local taxes explains how to find your state's tax agency.

What about income tax on an inheritance?

This is a third question, separate from both. The IRS states that making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax (IRS gift tax FAQ).

Later sales can be a different story. The IRS explains in its gifts and inheritances FAQ that if you sell inherited property, you may have a taxable gain. Your basis in inherited property is generally its fair market value on the date of death, or on an alternate valuation date if the executor elects it on an estate tax return. Keep any valuation documents the executor gives you.

Who is responsible for what

• The executor or personal representative generally handles the estate's tax filings, including any federal estate tax return and any state estate tax return.
• Heirs may be responsible for an inheritance tax in states that have one, depending on state rules and on how the will or estate plan handles it.
• Everyone who later sells inherited property may need to report that sale on their own income tax return.

The IRS has an information page for executors and Publication 559, Survivors, Executors, and Administrators, which cover many of these steps.

Questions to ask a lawyer or tax professional

1. Does the estate need to file a federal estate tax return, or would it make sense to file one for portability?
2. Does our state have an estate tax, an inheritance tax, both, or neither?
3. If property is in more than one state, which state's rules apply?
4. Who pays any inheritance tax: the heir or the estate?
5. What values will be used for each asset, and what records should we keep?
6. Are there deadlines for state filings?

An estate planning and probate lawyer can help with the estate itself, and a tax lawyer can help with disputes or complex filings. Ask how they charge and get it in writing.

Frequently asked questions

Is there a federal inheritance tax?

No. The federal government has an estate tax, which looks at the whole estate. Inheritance taxes, where they exist, are state taxes.

Do I pay income tax on money I inherit?

The IRS says leaving an estate to heirs does not ordinarily affect federal income tax. Selling inherited property later may create a taxable gain.

Does every estate have to file a federal estate tax return?

No. A return is required when the estate is above the filing threshold for the year of death, or when the estate elects portability for a surviving spouse.

Can a state tax an estate even if no federal tax is due?

Yes, some states have their own estate or inheritance tax with their own rules. Check your state's tax agency.

Related: Browse more legal guides and tax lawyers.

General information, not legal advice. Laws change and every case is different — talk to a licensed attorney about your situation.