Texans receiving an inheritance often have questions about their tax liabilities. Understanding potential obligations as a beneficiary is helpful for navigating the process. This article outlines considerations for beneficiaries in Texas, explaining how rules may differ based on asset types and origins.
Distinction From Estate Taxes
Inheritance tax and estate tax both concern asset transfers after death, but they differ in who bears the tax burden. An inheritance tax is levied on the beneficiary receiving the assets. Conversely, an estate tax is imposed on the deceased’s total estate before distribution to heirs.
Texas does not impose an inheritance tax or a state-level estate tax.1Texas Comptroller Manual of Accounts. Inheritance Tax This simplifies matters at the state level for those managing the financial aftermath of a loved one’s passing.
While Texas has no state estate tax, the federal government does levy one. This tax applies to a deceased person’s entire taxable estate and is paid by the estate, not individual beneficiaries. A large federal exemption exists; for individuals dying in 2025, the basic exclusion amount is $13.99 million.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2025 Estates below this value owe no federal estate tax. This amount is indexed for inflation.
For married couples, this exemption can be doubled through portability, allowing a surviving spouse to use the deceased spouse’s unused exclusion. This election must be made on a timely filed estate tax return (Form 706).3Federal Register. Portability of a Deceased Spousal Unused Exclusion Amount The current higher exemption levels are scheduled to be reduced to lower, pre-2017 inflation-adjusted levels after December 31, 2025, unless Congress acts to change this.
Exemptions Under Texas Law
Although Texas does not have an inheritance tax, beneficiaries might find other state tax benefits for inherited property, especially real estate. If an inherited home in Texas becomes your primary residence, you may qualify for a homestead exemption. This can reduce the home’s appraised value for property tax purposes, lowering your tax bill. Recent Texas law simplified the process for those inheriting their primary residence to obtain a 100% homestead exemption, even with co-owners.4Texas Legislature Online. SB 1943 – Enrolled Version (86R)
Other Texas property tax exemptions may apply depending on a beneficiary’s circumstances. These include exemptions for disabled veterans, which can extend to a surviving spouse. Surviving spouses of first responders or U.S. armed services members killed in the line of duty may receive a total property tax exemption on their residence homestead under specific conditions. Homeowners aged 65 or older can also receive additional homestead exemptions and benefit from a school tax ceiling, preventing school taxes from rising beyond the amount assessed when they qualified, barring significant home improvements.
Intangible personal property in Texas is not taxable, with few exceptions. For inherited motor vehicles, receiving one without debt as specified in a will or through an Affidavit of Heirship for a Motor Vehicle is subject to a $10 gift tax if the executor signs an Affidavit of Motor Vehicle Gift Transfer.5Texas Comptroller of Public Accounts. Motor Vehicle Tax Guide – Gift Transfers If an heir assumes debt on the vehicle or provides other payment, regular motor vehicle tax may apply.
Potential Obligations for Beneficiaries
While Texas does not impose an inheritance tax, beneficiaries may face federal obligations and ongoing responsibilities of asset ownership. A main consideration is federal capital gains tax if an inherited asset is later sold. The inheritance value itself is not considered income for federal tax purposes. However, profit from selling an inherited asset, such as real estate or stocks, could be subject to capital gains tax.
The calculation of this gain uses the stepped-up basis rule. An inherited asset’s cost basis is adjusted to its fair market value on the decedent’s death date.6Legal Information Institute (Cornell Law School). 26 U.S. Code § 1014 – Basis of Property Acquired From a Decedent This means capital gains tax applies only to appreciation occurring after inheritance, not gains accrued during the deceased owner’s lifetime. For example, if a home bought for $100,000 is worth $500,000 when inherited, the beneficiary’s basis becomes $500,000. A later sale at $550,000 would incur capital gains tax only on the $50,000 profit. This rule applies to assets like stocks and bonds but not to certain retirement accounts such as 401(k)s or IRAs.
Beneficiaries are also responsible for income generated by inherited assets. Rental income from an inherited property or dividends from inherited stocks must be reported on personal tax returns.
Upon inheriting property, the new owner is responsible for ongoing obligations like property taxes. If multiple heirs jointly inherit property, they share responsibility for its upkeep and financial duties.
U.S. citizens and resident aliens receiving foreign inheritances exceeding $100,000 must report them to the IRS on Form 3520.7Internal Revenue Service. About Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts This filing helps track foreign assets. If inherited foreign assets remain abroad and generate income or meet certain value thresholds, other annual reporting, like an FBAR or Form 8938, may be required.
Role of Probate in Tax Assessment
The probate process is important for overall tax considerations, particularly at the federal level and for establishing asset values. Probate is a court-supervised legal process to validate a will, appoint an executor, identify assets, pay debts and taxes, and distribute remaining property.
During probate, the executor files an inventory with the court, detailing all estate property and its fair market value at the time of death. This valuation is used for determining if the estate owes federal estate taxes. If the gross estate value exceeds the federal exemption, the executor must file a federal estate tax return (Form 706) and pay any due taxes from estate assets.8Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return Probate courts require proof that all debts and taxes are settled before closing the estate.
The asset values established during probate serve as the beneficiaries’ cost basis in the inherited property, supporting the stepped-up basis for calculating capital gains or losses upon future sale. This documentation helps beneficiaries accurately report federal tax obligations.
Probate also ensures the decedent’s final debts, including any outstanding income taxes, are settled. The executor files the decedent’s final individual income tax return (Form 1040) and, if the estate generates income during administration, an estate income tax return (Form 1041). Payment of these taxes from estate assets means beneficiaries receive their inheritance net of these specific liabilities.
Out-of-State Inherited Assets
When a Texas resident inherits assets located in another state, tax implications can become more involved. The state where the property is physically situated may have its own inheritance or estate tax laws, potentially obligating a Texas beneficiary to pay taxes to that other state.
Taxation of inherited property, especially real estate, is governed by the state of its location. Some states, including Nebraska, Kentucky, Pennsylvania, Maryland, and New Jersey, levy an inheritance tax.9Tax Foundation. Estate and Inheritance Taxes by State, 2024 These states have distinct rates and exemptions that often vary by the beneficiary’s relationship to the deceased. For example, direct descendants may face lower rates than more distant relatives or non-relatives.
Some states, such as Washington, Oregon, New York, and Illinois, impose an estate tax. This tax is paid by the decedent’s estate from its assets before distribution. Exemption amounts and tax rates in these states differ.
The type of out-of-state asset is also relevant. Real property and tangible personal property are taxed by the state where they are located. Intangible personal property, like bank accounts or stocks, is taxed by the decedent’s state of residence. If a Texas resident owned real estate in another state, a separate probate process called ancillary probate may be necessary in that state to legally transfer the property and address any applicable state death taxes.
Noncompliance Consequences
Failure to comply with federal tax obligations related to inherited assets or estate administration can lead to serious repercussions from the Internal Revenue Service. These mainly affect the estate or its executor but can indirectly impact beneficiaries.
If an estate’s value exceeds the federal exemption, the executor must file Form 706. Failure to file or pay by the deadline can trigger penalties. The failure-to-file penalty is 5% of unpaid tax per month (up to 25%), and the failure-to-pay penalty is 0.5% per month (up to 25%).10Internal Revenue Service. Failure to Pay Penalty Interest is also charged on underpayments and unpaid penalties.
The executor can be held personally liable for unpaid federal taxes if assets are distributed before settling these debts, up to the value of distributed assets.
Beneficiaries face direct consequences for noncompliance regarding foreign inheritances or income from inherited assets. Failure to timely file Form 3520 for foreign inheritances over $100,000 can result in penalties, potentially 5% of the gift amount per month (up to 25%). Underreporting capital gains from selling inherited assets can lead to accuracy-related penalties of 20% of the underpayment.
More severe cases, such as willful tax evasion, can result in felony charges, fines, and imprisonment. Willfully failing to file a return or pay tax is a misdemeanor with potential fines and imprisonment. Such criminal actions are reserved for serious cases of intentional fraud.