Is Inheritance Taxable in New York? The Estate Tax Rules

When an individual passes away, beneficiaries often have questions about financial implications. While some states impose an “inheritance tax” directly on recipients, New York does not. Instead, New York levies an “estate tax” on the deceased person’s total property and assets before distribution. The estate itself, not individual heirs, is responsible for paying this tax.

New York Estate Tax Overview

The New York Estate Tax is a levy applied to the value of a deceased person’s property and financial holdings at the time of their death. It is a tax on the right to transfer property at death, impacting the overall value available for distribution. The purpose of this tax is to generate revenue for the state from larger estates. Estates generally comprise all property an individual owned or controlled at the time of their passing.

Determining Taxable Estate Value

To ascertain if a New York estate is subject to tax, its total value must first be calculated to determine the “gross estate.” This comprehensive valuation includes nearly all property owned by the deceased at the time of death. Common assets such as real estate, bank and investment accounts, vehicles, personal property, and business interests are included. Assets held in a revocable living trust or proceeds from life insurance policies where the deceased was the owner are also part of the gross estate. For jointly owned property, only the deceased’s share is included.

After determining the gross estate, various deductions can reduce its value to arrive at the “taxable estate.” These deductions include outstanding debts and liabilities, reasonable funeral expenses, and costs associated with administering the estate, such as fees for executors, attorneys, and accountants. An unlimited marital deduction allows property transferred to a surviving spouse to be exempt from estate tax. Bequests made to qualifying charitable organizations can also be deducted.

The New York estate tax applies only to estates exceeding a certain threshold, known as the basic exclusion amount. For individuals passing away in 2025, this exemption is $7.16 million. If the total value of the taxable estate falls below this amount, no New York estate tax is generally owed. This exclusion amount is adjusted periodically.

Calculating and Paying New York Estate Tax

Once the taxable estate value has been determined, the New York estate tax is calculated using a progressive rate structure. Rates range from 3.06% to 16%, increasing as the taxable estate’s value rises.

A unique feature of New York’s estate tax is the “cliff effect,” which can significantly impact estates that only slightly exceed the exemption amount. If the taxable estate’s value is greater than the basic exclusion amount but less than 105% of that amount (approximately $7.518 million for 2025), the tax applies only to the portion exceeding the exemption. However, if the taxable estate’s value surpasses 105% of the exemption, the entire estate becomes subject to tax from the first dollar, effectively losing the exemption benefit. This can lead to a substantial and unexpected tax liability.

For estates exceeding the New York basic exclusion amount, a New York estate tax return, Form ET-706, must be filed. A federal estate tax return, Form 706, must also be filed with the New York Tax Department, even if no federal estate tax is due. The deadline for filing the return and paying any tax due is generally nine months after the decedent’s date of death.

An estate can apply for an extension of time to file the return, typically for an additional six months, by submitting Form ET-133. Even if an extension to file is granted, the tax payment is still due by the original nine-month deadline. In cases of undue hardship, an extension to pay the tax for up to four years may be granted. Penalties and interest may be assessed for late filing or late payment.

Federal Estate Tax Considerations

Separate from state-level taxes, a federal estate tax applies to very large estates. This federal tax operates independently of the New York estate tax, with its own distinct rules and exemption thresholds. For individuals passing away in 2025, the federal estate tax exemption is $13.99 million.

An estate might be subject to the New York estate tax, the federal estate tax, both, or neither, depending on its total value. For example, an estate could be below the federal threshold but still owe New York estate tax due to the state’s lower exemption. While federal law allows for “portability” of an unused exemption between spouses, New York does not offer this provision. Each spouse’s New York exemption must be utilized individually.

Income Tax on Inherited Assets

While New York does not impose an inheritance tax on beneficiaries, and the inheritance itself is generally not considered taxable income, income tax considerations exist for inherited assets. This is primarily due to the “step-up in basis” rule. This rule adjusts an inherited asset’s cost basis to its fair market value on the original owner’s death date. Consequently, if the heir later sells the asset, they are typically only taxed on appreciation in value occurring after the decedent’s death, significantly reducing potential capital gains taxes.

Despite the general income tax exemption for the inherited principal, any income generated by inherited assets after receipt by the beneficiary is subject to income tax. For instance, rental income from an inherited property or dividends from inherited stock would be taxable income. If an inherited asset is sold for more than its stepped-up basis, the capital gain realized from that sale would also be subject to income tax. However, certain assets, like inherited IRAs and other retirement accounts, generally do not receive a step-up in basis, and withdrawals are typically taxed as ordinary income to the beneficiary.