You may assume that taxes will consume a significant portion of the estate that will be transferred to your loved ones. Though there is a federal estate tax and a state-level estate tax here in New York, there is a good chance that they will not impact your legacy.
Let’s take a look at taxes on inheritances so you can go forward with a complete understanding of the lay of the land.
Regular Income Taxes
When someone inherits money or property, they usually do not owe income tax on what they receive. This rule often comes as a relief.
The reason is simple: your estate consists of what is left after you have already paid taxes on your earnings and investments. The government generally does not tax those assets again as ordinary income when your heirs receive them.
However, there are some important exceptions. If your estate includes traditional individual retirement accounts (IRAs), distributions will be taxable to your beneficiaries. Since those funds were not taxed when you contributed them, the tax bill comes due when your heirs take withdrawals.
Also, if your estate has assets held in certain types of trusts, any undistributed income those trusts earned can be subject to income tax. These situations require careful planning to avoid surprises for your loved ones.
Federal Estate Tax
The federal estate tax applies only to estates that exceed a high threshold. In 2025, the exclusion amount is $13.99 million per person. If your estate is smaller than that amount, no federal estate tax will apply.
If you are married, you can combine your exemptions to protect nearly $28 million as a couple. Anything above the exemption is taxed at rates that start at 18 percent and rise to 40 percent.
Keep in mind that these figures can change based on federal law. Congress has the power to adjust the exemption or the tax rates in the future. For this reason, it is wise to review your estate plan regularly to be sure it remains effective.
Federal Gift Tax
You might think you could avoid the estate tax by giving away assets during your lifetime. Unfortunately, the federal gift tax is designed to prevent this strategy.
The good news is that the gift tax shares the same lifetime exclusion as the estate tax. That means you can give away up to $13.99 million without triggering tax liability. Large gifts simply reduce your available exemption at death.
In addition to the lifetime exclusion, you can make annual gifts of up to $19,000 per person without affecting your exemption. If you are married, you and your spouse can combine your gifts to give $38,000 per recipient each year.
There are also special exclusions that allow you to pay unlimited amounts for someone’s tuition or medical bills.
To qualify, you must pay the provider directly rather than reimbursing the individual. These rules make it possible to help family members in meaningful ways without using any of your other exemptions.
New York Estate Tax
While the federal exemption is high, New York imposes its own estate tax with a lower threshold. In 2025, the New York exemption is $7.16 million. Estates above this amount are subject to tax rates between 3.06 percent and 16 percent.
New York’s tax also includes a unique provision known as the “cliff.” If your taxable estate exceeds 105 percent of the exemption, you lose the benefit of the exemption entirely.
This means that if your estate is even slightly over the limit, the tax can apply to the full value, not just the excess.
For example, if your estate is worth $7.3 million, the exemption does not apply, and the entire amount becomes taxable. This “cliff” can create significant tax exposure for estates just above the threshold.
Planning strategies such as lifetime gifting or charitable donations can help keep your estate under the limit and avoid this harsh result.
Capital Gains Tax
When your heirs inherit an asset that appreciated while you owned it, they benefit from a step-up in basis. This means the asset’s value for capital gains tax purposes is adjusted to its fair market value at the date of your death.
For example, if you bought stock for $100,000 and it is worth $300,000 when you pass away, your heirs’ basis is $300,000.
If they sell it soon after, they will owe little or no capital gains tax because the gain is calculated from the stepped-up value. This rule often reduces the tax burden significantly and allows your loved ones to keep more of the proceeds.
Summing It Up
Understanding the good, the bad, and the ugly of inheritance taxes helps you plan with confidence. With the right strategies, you can protect your assets and provide clarity for the people you care about most.
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To schedule a consultation at our Staten Island, NY estate planning office, call us at 332-456-0500 or send us a message through our contact page.
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