No – children generally do not pay any federal inheritance tax on assets they receive. According to a recent estate planning survey, 60% of parents mistakenly assume their children will face inheritance taxes. In reality, U.S. law imposes no federal inheritance tax on any beneficiary, and most states either have no inheritance tax or fully exempt lineal heirs like children. In this article you’ll learn:
- 👪 Who actually pays inheritance tax: Understanding estate vs. inheritance tax and beneficiary responsibilities.
- 🏛 Federal vs. state rules: How U.S. law treats children’s inheritances differently across jurisdictions.
- 🚫 Common pitfalls: Mistakes families make in inheritance planning and how to avoid them.
- 📊 Real examples: Sample scenarios of children inheriting money in various states.
- 🔑 Key terms explained: Definitions like estate tax, exemption, and lineal descendant.
Federal Law: Why Your Child Usually Pays $0
Under U.S. federal tax law, there is no inheritance tax at all. Instead, the federal government may impose an estate tax on very large estates (taxing the estate before assets are distributed). As of 2024, the federal estate tax exemption is about $13.61 million per person. This means only estates larger than that owe federal tax. Even then, the estate itself pays that tax – not the children. So if your estate is under the exemption threshold, the federal government simply collects nothing, and your heirs get everything tax-free.
Because children receive a step-up in basis on inherited assets (resetting the asset’s tax cost to its value at death), heirs don’t pay income tax on the inheritance either. For example, if a parent bought stock for $10,000 and it’s worth $100,000 at death, the child can sell it later and only pay capital gains on the $100,000 base. In short, inheritances are not taxable income to the child under federal law. The bottom line: your child will never pay federal income tax or a separate federal inheritance tax on what they inherit.
Estate Tax vs. Inheritance Tax
To avoid confusion, remember: estate tax is charged to the deceased’s estate; inheritance tax is paid by the heir. Under current U.S. code, only the estate tax survives federally. Children (as heirs) are not on the hook for any federal “death taxes.” In fact, estate planners often point out that planning tools like lifetime gifting or trusts mostly affect estate tax outcomes – not inheritance tax for kids. This is because the U.S. hasn’t had a federal inheritance tax since 1902.
For most families, this means federal taxes are rarely a problem. Even very wealthy estates use exclusions, deductions, and gift-tax strategies to minimize estate tax. Children benefit: if the estate estate is over the exemption, the estate may pay some tax, but the child still gets the net inheritance with no additional tax bill. If the estate is under the exemption, neither estate nor inheritance taxes apply.
State Law: Do Your Kids Owe State Inheritance Tax?
Inheritance taxes in the U.S. are mostly a state issue. As of 2024, only a handful of states levy inheritance taxes at all. If a parent lived (or owned property) in a no-inheritance-tax state (most states fall into this category), then children pay nothing at the state level. Even in states that do have an inheritance tax, the rules for direct descendants (children, grandchildren, etc.) are usually very favorable:
- Fully exempt states: Several states have no inheritance tax at all (for anyone), and at least three states with inheritance tax fully exempt children and other lineal heirs. For example, Kentucky and Maryland exempt a child inheriting from a parent entirely – no tax due. New Jersey repealed its inheritance tax in 2018, so even there children are tax-free.
- Partial exemptions: In some states, children are exempt up to a large amount. Nebraska allows a $100,000 exemption per lineal heir; above that only a 1% tax applies to inheritances for children. This means a child inheriting $200,000 in Nebraska would pay just $1,000 in tax – a tiny burden on a relatively large inheritance.
- Limited cases of tax: Only a couple of states charge a tax on inheritances to adult children. Pennsylvania, for instance, is famous for its inheritance tax: surviving spouses and children under 21 pay 0%, but children over 21 pay 4.5% on everything they receive. So if a 25-year-old child inherits $100,000 from a Pennsylvania parent, they owe $4,500. Still, minor children (under 21) in PA owe nothing.
In summary, your child’s inheritance tax liability depends on the state, but the safe assumption is that most states either have no inheritance tax or will exempt your child completely. If you live in or the decedent owned property in Pennsylvania or Nebraska, check the rules: child-beneficiary exemptions still keep most kid inheritances tax-free or very low-tax.
It’s also important to note that inheritance tax is based on the decedent’s state. If your parent lived in a state like Florida (no inheritance tax), it doesn’t matter that you live in New York or California. Only the state of the estate matters. And since most states don’t tax inheritances, your child usually won’t even file anything.
🚫 Avoiding Common Pitfalls
Even though kids are usually safe, families often trip up by misunderstanding the rules. Avoid these mistakes:
- Mixing up taxes: Inheritance is not the same as income or property tax. Don’t assume your child has to pay federal income tax just because they got cash or property. It isn’t taxable income. Also, avoid thinking “I already paid income tax when I earned this money, why would my child get taxed again?” The law simply doesn’t treat inheritances as earnings.
- Overlooking state laws: Just because there’s no federal inheritance tax, some people worry there is. Check your state (and the decedent’s state). For example, if Grandma lived in Pennsylvania, remember only her minor children are exempt. Inheriting a family home in Pennsylvania as an adult could trigger a 4.5% tax. If you ignore these state rules, you might be caught off guard.
- Assuming every child pays inheritance tax: The rule of thumb is that spouses and lineal descendants are almost always exempt. Don’t assume “everyone pays 10-15%.” Instead, find out the specific class rules. Often, nieces, nephews, and unrelated heirs face the tax, but not your own kids.
- Not planning the estate threshold: If the estate is huge, the estate tax (not inheritance tax) could be a factor. Don’t focus only on inheritance tax. Estates over $13.6M face a heavy tax at 40%. Plan for this with gifts or trusts if needed, because it indirectly affects what children receive. Remember: estate tax is paid by the estate’s executor, but if the estate funds are depleted by tax, heirs get less.
- Ignoring trusts and gifts: Sometimes parents think “my child should inherit, so I’ll put everything in a trust and avoid taxes.” Trusts can be valuable estate-planning tools, but for inheritance tax on children, the issue is usually moot anyway. However, heavy gifting to children could trigger the federal gift tax if above $17,000 per year (2024 limit). Just know: giving $15,000 per year to your child is tax-free, but $100,000 in one gift might need a gift tax return (though often no tax is due up to the $13.6M lifetime exclusion).
By keeping these pitfalls in mind, parents can ensure the family isn’t surprised by a tax bill. The main takeaway: check your state’s rules, but know that kids are generally in the clear.
Real-World Examples: Children Inheriting Wealth
Let’s illustrate with some typical scenarios. Each example shows who pays taxes on a child’s inheritance in that situation.
| Scenario | Tax Outcome for Child |
|---|---|
| Child inherits $200,000 from a parent in Florida (no inheritance tax state) | $0 in inheritance tax. Florida has no inheritance tax, and the federal estate tax exemption covers $200k. Child owes $0 at both levels. |
| Child inherits $20,000,000 from a parent in Texas (no inheritance tax state) | The estate owes federal estate tax (about 40% on the $6.39M over the exemption), but the child pays $0 inheritance tax. The child’s inheritance comes to them tax-free after the estate tax is paid. |
| Adult child inherits $300,000 from a parent in Pennsylvania | Pennsylvania inheritance tax is 4.5%. The child owes $13,500 (4.5% of $300k). No federal inheritance tax applies. If the child were under 21, Pennsylvania would exempt them entirely (0% tax). |
| Child inherits $150,000 from a parent in Nebraska | Nebraska exempts the first $100,000 to children at 0% and taxes amounts above at 1%. So, child owes $500 (1% of the $50k above $100k). |
| Child inherits $5,000,000 from a parent in Maryland | Maryland has no inheritance tax on children. The estate might owe federal estate tax on the $X over $13.61M exemption, but the child’s inheritance is tax-free at the state level. |
Each scenario shows the common thread: children’s inheritances are usually tax-free or very low-tax. In non-tax states like Florida or Texas, children simply pay nothing. In states with an inheritance tax, the rules favor lineal heirs: either exempt (PA minors, MD children) or only modest rates (NE).
Key Comparisons: Inheritance Tax vs. Estate Tax
It helps to compare inheritance tax (paid by heirs) with estate tax (paid by the decedent’s estate):
- Who pays: Inheritance tax is (in theory) paid by the beneficiary of the inheritance. Estate tax is paid by the estate of the deceased, before distribution. In practice, your child almost never pays inheritance tax, but your estate might owe estate tax if it’s large.
- Exemptions: Only 6 states have inheritance taxes (PA, MD, NE, KY, NJ, IA) and almost all exempt children. By contrast, every U.S. estate is subject to federal estate tax rules, but most estates are exempt due to the $13.61M limit. Some states (like New York, DC, MA) also have their own estate taxes, but again, usually applied to the estate, not the child.
- Rates: Inheritance tax rates in those few states are modest (often under 16%) and usually only apply to distant relatives or non-relatives. Estate tax rate is a flat 40% on the top end. However, since it’s paid by the estate, the child’s share is only reduced as a byproduct of that payment.
- Filing: If a state inheritance tax applies, it’s typically the executor or the heir who must file. Federal estate tax returns are filed by the estate’s executor. Children seldom file inheritance tax returns unless required by a state (like PA or NE).
Here’s a simple pros/cons table for families considering inheritance tax implications:
| Pros for Children | Cons for Children |
|---|---|
| High exemptions: Most inheritances fall below tax thresholds or beneficiaries (children) are exempt, so kids usually get $0 tax. | State variations: Some kids may be subject to small state taxes (e.g. PA adults, NE large inheritances) if unaware. |
| No federal inheritance tax: Simplifies estate transfers. | Estate tax impact: Large estates pay federal tax which can reduce the inheritance, though not paid by kids directly. |
| Stepped-up basis: Children get a fresh tax basis, reducing capital gains on sold assets. | Complex rules: Different state laws can confuse families and lead to planning oversights. |
Important Terms & Concepts to Know
- Estate: The total assets a person leaves behind at death (cash, investments, property, etc.). The estate may owe taxes before distributing to heirs.
- Exemption (or Exclusion): The value threshold below which taxes don’t apply. For federal estate tax, it’s $13.61M (2024). For inheritance tax states, children often have separate exemptions (e.g., Nebraska’s $100k).
- Beneficiary (Heir): The person who receives assets from the decedent. In our topic, “child” refers to a beneficiary who is a son/daughter of the deceased.
- Lineal descendant: Direct offspring (children, grandchildren, etc.). Most inheritance tax laws give lineal descendants favorable treatment (often 0% rate).
- Gross estate: The total value of all of the decedent’s property before any deductions. Tax calculations often start from this number.
- Step-up in basis: For tax purposes, an inherited asset’s cost basis is “stepped up” to its market value at death. This means selling the asset soon after inheriting can result in little or no capital gains tax.
- Gift tax vs. estate tax: Federal gift tax covers large lifetime gifts (over $17,000/year per person in 2024). Federal estate tax covers transfers at death. There is no separate inheritance tax at the federal level.
Understanding these terms helps demystify inheritance planning. Remember that children as direct heirs are almost always treated as a special class for tax purposes. States and the IRS generally assume immediate family should not be taxed harshly on inheritances.
FAQs
Q: Will my child have to pay federal inheritance tax on their inheritance?
A: No – there is no federal inheritance tax. Only estates over the $13.61M exemption may owe federal estate tax (paid by the estate, not the child).
Q: Will my child owe state inheritance tax on the assets I leave?
A: Not usually – most states have no inheritance tax, and those that do typically exempt children. Only a few (like PA or NE) might charge a small rate to adult children.
Q: Is inheritance money taxable as income for my child?
A: No – inherited cash or property is not considered income. Children do not pay income tax on the inheritance itself. (They may owe capital gains tax later if they sell assets at a profit.)
Q: If I give money to my child now, will they still pay inheritance tax later?
A: No – gifts are covered by gift-tax rules, not inheritance tax. Small gifts (under $17,000/year) are tax-free. Gifting can reduce estate taxes but doesn’t trigger inheritance tax for the child.
Q: What if my child is a minor; do they pay inheritance tax differently?
A: No – inheritance tax rules don’t usually change based on the heir’s age. In states like Pennsylvania, both minors and young adults under 21 are exempt, so a minor child pays 0% tax.