Do I Have to Pay Taxes on an Inheritance in Washington State?

When you receive an inheritance in Washington State, you generally do not pay a direct “inheritance tax” on the money or assets you receive. An inheritance tax is a tax levied on the beneficiary who receives the assets. However, other tax considerations can arise, such as a state “estate tax,” which is paid by the deceased person’s estate before assets are distributed, and potential federal taxes depending on the estate’s size or the type of inherited asset. This article clarifies these distinctions and provides a general overview of the tax implications for inherited assets in Washington State.

Washington State’s Inheritance and Estate Tax Landscape

Washington State has an “estate tax,” which is levied on the total value of a deceased person’s estate before any assets are distributed to beneficiaries. This tax is governed by Revised Code of Washington (RCW) Chapter 83.100, known as the Estate and Transfer Tax Act.

The Washington State estate tax exemption threshold for deaths occurring in 2024 or 2025 is $2.193 million. This means if the gross value of the decedent’s estate is below this amount, no state estate tax is owed. The exemption amount is intended to be indexed for inflation annually, but it has remained at $2.193 million since 2018 due to a change in the consumer price index used for adjustment and a lack of corresponding legislative update.

For estates exceeding the exemption, the Washington State estate tax applies progressively, with rates ranging from 10% to 20%. The tax rate increases as the estate’s value grows. The estate’s executor or personal representative is typically responsible for calculating and paying this tax, which reduces the overall value of the estate available for distribution.

The taxable estate for Washington State purposes generally includes all real and personal property owned by the decedent at the time of death, located within the state.

Federal Estate Tax Considerations

Separate from state-level taxes, the U.S. government levies a federal estate tax on the transfer of property at death, outlined in Title 26 U.S. Code, Subtitle B, Chapter 11. This tax is imposed on the estate’s total value before distribution to beneficiaries.

The federal estate tax exemption amount is significantly higher than Washington State’s exemption and is also adjusted annually for inflation. For deaths occurring in 2025, the federal estate tax exemption is $13.99 million per individual. This means that a married couple could have a combined exemption of $27.98 million.

Due to this substantial exemption, the vast majority of estates do not incur federal estate tax. Only the portion of an estate that exceeds the $13.99 million threshold is subject to the tax. The federal estate tax is paid by the deceased person’s estate, not by individual beneficiaries.

A concept known as “portability” allows a surviving spouse to use any unused portion of their deceased spouse’s federal estate tax exemption. This can effectively double the exemption for married couples, providing a combined exclusion amount for their heirs.

Income Tax on Inherited Assets

While direct inheritance or estate taxes are typically not a concern for beneficiaries in Washington State, certain types of inherited assets can trigger income tax obligations. Most inherited property, such as real estate, stocks, or mutual funds, benefits from a “stepped-up basis.” This means the asset’s cost basis is adjusted to its fair market value on the decedent’s date of death. If the beneficiary later sells the asset, they generally only pay capital gains tax on any appreciation that occurs after the decedent’s death.

A significant exception to the stepped-up basis rule applies to inherited retirement accounts, such as IRAs and 401(k)s. These accounts generally do not receive a step-up in basis, and distributions from them are typically taxed as ordinary income to the beneficiary. The rules for inherited IRAs vary based on the beneficiary’s relationship to the deceased.

Spousal beneficiaries often have options, including rolling the inherited IRA into their own IRA or treating it as their own, which allows them to defer distributions until their own retirement. Non-spouse designated beneficiaries are generally subject to the 10-year rule under the SECURE Act, meaning the entire inherited account must be distributed within ten years following the original owner’s death. Non-designated beneficiaries, such as an estate or charity, may have different distribution requirements. Other assets that could be subject to income tax upon receipt or sale include inherited annuities, where the built-in gains are taxed, or U.S. savings bonds, where accrued interest is taxable.

Guidance for Beneficiaries

Beneficiaries should prioritize understanding the cost basis of any inherited assets, particularly for non-retirement accounts. This information is crucial for accurately calculating potential capital gains or losses if those assets are sold in the future. The estate’s executor or administrator is the primary source for obtaining necessary documentation, such as valuation reports, probate documents, and records of any estate taxes paid.

Gathering all relevant paperwork ensures that beneficiaries have a complete picture of their inheritance and any associated tax implications. Consulting with a qualified tax professional, such as a Certified Public Accountant (CPA) or an enrolled agent, or an estate attorney, is advisable. This is particularly true for complex estates, substantial inheritances, or specific asset types like inherited retirement accounts, where specialized guidance can help navigate distribution rules and minimize tax burdens.