Understanding the Tax Implications of Inheriting Property or Money

Inheriting property or money can be a bittersweet experience, often marked by the emotional loss of a loved one and the practical responsibility of managing new assets. One of the most common concerns people have when they receive an inheritance is whether they will owe taxes on it. The answer depends on several factors, including the nature and size of the inheritance and how the assets are transferred.

First, it is important to understand that the federal government does not impose an inheritance tax. That means if you inherit money, real estate, or other property, you generally will not owe federal taxes simply because you received it. However, a few states do impose inheritance taxes. Fortunately for residents of Mississippi, the state does not have its own inheritance tax, so beneficiaries in Mississippi typically do not face any state-level tax on inherited assets.

Although recipients of inheritances usually do not pay taxes, the estate of the person who passed away might, depending on its size. This is where the concepts of estate tax and gift tax become relevant. These taxes are part of a unified federal system designed to prevent individuals from avoiding estate tax by giving away their wealth during life instead of transferring it upon death. Essentially, the estate tax applies to the value of a person’s estate at the time of their death, while the gift tax applies to certain transfers of money or property made during their lifetime.

Both the estate tax and gift tax are governed by a single lifetime exemption. This exemption is the total amount that a person can transfer without incurring federal tax, whether those transfers happen through lifetime gifts or as part of an estate after death. For the year 2025, the federal estate and gift tax exemption is $13.99 million per individual. This means that a person can transfer up to $13.99 million in assets, either through gifts made during life, through inheritance at death, or some combination of the two, without triggering federal estate or gift tax. For married couples, this exemption can be effectively doubled to $27.98 million with proper estate planning. Any amount transferred above the exemption threshold may be subject to a federal estate or gift tax, which is currently levied at a top rate of 40 percent.

It is important to note that this exemption amount is not permanent. Under current federal law, the exemption is scheduled to be reduced by approximately half beginning in 2026 unless Congress acts to extend or revise the law. This anticipated change makes estate planning even more critical, particularly for individuals and families with significant assets.

In summary, while most people who inherit assets will not owe taxes directly, the estate of the deceased may be subject to tax if it exceeds the federal exemption limits. Understanding how the gift and estate taxes work together, and staying informed about changing exemption amounts, can help ensure that your legacy is protected and transferred in the most tax-efficient way possible. For those navigating the inheritance process or planning their estate, consulting with a qualified attorney or tax advisor is a wise step toward clarity and peace of mind.