Does North Carolina Have an Estate Tax?

North Carolina does not have a state-level estate tax, meaning the state government will not tax a deceased resident’s assets before they are transferred to heirs. The state also does not impose an inheritance tax, a separate tax levied on individuals who receive the inheritance. This absence of state “death taxes” simplifies the estate settlement process for most residents, shifting the focus toward potential federal requirements.

History of the North Carolina Estate Tax

North Carolina has not always been without an estate tax, formally repealing it in July 2013, retroactive to January 1, 2013. This legislative change was tied to shifts in federal tax law. Previously, the state’s tax was structured to capture a portion of the federal estate tax liability through a state death tax credit. When federal law phased out this credit, the state’s tax structure became obsolete, leading lawmakers to repeal it.

North Carolina Inheritance Tax Explained

It is common to confuse an estate tax with an inheritance tax as they operate differently. An estate tax is paid directly by the deceased person’s estate, meaning the total value is reduced before assets are distributed to beneficiaries. In contrast, an inheritance tax is levied on the person who receives the assets, and the tax rate often depends on the heir’s relationship to the deceased. North Carolina does not have an inheritance tax, so beneficiaries do not owe any state tax for inheriting property.

The Federal Estate Tax Requirement

While North Carolina does not have an estate tax, residents are still subject to the federal estate tax. This tax applies only to estates with a very high value. For 2025, the federal estate tax exemption is $13.99 million per individual, meaning a person can pass on that amount in assets without incurring federal estate tax. The tax, which can be as high as 40%, only applies to the value of the estate that exceeds this exemption amount.

The exemption amount is indexed for inflation and can change. Under current law, the exemption amount is scheduled to be cut by about half at the end of 2025.

A provision in federal tax law known as “portability” allows a surviving spouse to use any unused portion of their deceased spouse’s federal exemption. With proper legal steps, a married couple can effectively shield nearly $28 million from federal estate taxes, making estate planning important for high-net-worth couples.

State Income Tax on Inheritances

The act of inheriting assets is not considered taxable income in North Carolina. When you inherit a house, stocks, or a cash savings account, you do not report that inheritance on your state income tax return. These assets receive a “step-up in basis,” which means the asset’s value for tax purposes is reset to its fair market value on the date of the original owner’s death. This can eliminate or reduce capital gains tax if the asset is later sold.

An exception involves inherited retirement accounts, such as traditional 401(k)s and IRAs. While the inheritance itself is not taxed, distributions from these accounts are. When a beneficiary withdraws money from an inherited traditional IRA, for example, that withdrawal is treated as ordinary income and is subject to federal and state income taxes in the year it is received. This is because the original contributions were made with pre-tax dollars, and taxes have not yet been paid on the funds.