Is Inheritance Taxable in Tennessee?

A primary concern for many beneficiaries is understanding their potential tax obligations. The rules governing inheritance involve state-specific laws, federal regulations, and the type of assets being transferred. This creates a landscape that requires careful navigation to ensure financial clarity.

Tennessee Inheritance and Estate Tax Status

For residents of Tennessee, the question of a state-level inheritance tax is straightforward. Tennessee does not impose an inheritance tax on beneficiaries, as this tax was officially repealed effective January 1, 2016. Consequently, for any death on or after that date, the person receiving the assets will not owe any inheritance tax to the state of Tennessee.

In conjunction with the inheritance tax repeal, Tennessee also eliminated its separate estate tax. Prior to 2016, the state taxed the decedent’s overall estate before distribution if it exceeded a certain value. The repeal of both taxes means that estates of Tennessee decedents are no longer subject to any state-level death taxes.

Federal Estate Tax Applicability

While Tennessee has no inheritance tax, the federal government imposes an estate tax, which functions differently. This tax is not paid by beneficiaries directly; instead, it is a tax on the deceased person’s taxable estate and is paid by the estate itself. The responsibility for filing and payment falls to the executor of the estate, not the individual heirs.

The vast majority of estates are not subject to this federal tax due to a substantial exemption amount. For deaths occurring in 2025, an estate is required to file a federal estate tax return, Form 706, only if its total gross value plus prior taxable gifts exceeds $13.99 million. Estates valued below this high threshold owe no federal estate tax.

This exemption is effectively doubled for married couples. A surviving spouse can use any of their deceased spouse’s unused exemption, a concept known as “portability,” potentially shielding nearly $28 million from federal estate tax in 2025. Any portion of an estate that exceeds the exemption amount is taxed at a federal rate that can be as high as 40%. Current law has this high exemption amount scheduled to be reduced significantly after 2025.

Taxation of Income from Inherited Assets

The act of inheriting property itself is generally not considered taxable income for the beneficiary at the federal level. This initial tax-free receipt does not extend to future earnings generated by the inherited property. Any subsequent income produced by the asset is taxable to the beneficiary who now owns it.

For example, if you inherit a rental property, the rental payments you collect are taxable income that must be reported. Similarly, inheriting a stock portfolio means any dividends paid out after you take ownership are taxable to you. If you later sell an inherited capital asset like real estate or stocks for a profit, that profit is subject to capital gains tax.

A tax provision that benefits heirs is the “step-up in basis.” For capital assets, the cost basis used to calculate capital gains is adjusted to the fair market value of the asset on the date of the original owner’s death. For instance, if your parent bought stock for $10,000 and it was worth $100,000 when they passed away, your basis becomes $100,000. If you sell it for $110,000, you only pay capital gains tax on the $10,000 of appreciation that occurred after you inherited it.

Rules for Inherited Retirement Accounts

Inherited retirement accounts, such as traditional 401(k)s and IRAs, follow a distinct set of tax rules and do not receive a step-up in basis. When a beneficiary takes a distribution from a traditional inherited IRA, the withdrawn amount is generally considered ordinary taxable income. In contrast, qualified distributions from an inherited Roth IRA are typically tax-free for the beneficiary, as the original contributions were made with post-tax dollars.

The rules for when you must withdraw the funds depend on your relationship to the decedent. A surviving spouse has the unique flexibility to treat the inherited IRA as their own by rolling the funds into their personal IRA. This allows the assets to continue growing tax-deferred and makes the spouse subject to standard required minimum distribution (RMD) rules based on their own age.

Most non-spouse beneficiaries are subject to regulations established by the SECURE Act. For deaths occurring after 2019, most non-spouse heirs must withdraw all funds from the inherited account by the end of the tenth year following the original owner’s death. There are some exceptions to this 10-year rule for certain individuals, such as minor children or disabled beneficiaries, who may be able to take distributions over their life expectancy.