Inheritance and estate taxes are taxes that governments levy when someone dies and transfers their wealth to someone else. An inheritance tax is a tax on what you inherit, while an estate tax is a tax on the estate of the person who died.
The good news is that North Carolina doesn’t have either an inheritance tax or an estate tax!
However, it’s still important to understand your federal estate tax obligations and other tax considerations when dealing with estate administration in North Carolina.
What is inheritance tax?
Inheritance tax is a tax on the assets a person receives from someone who has died. The tax is paid by the person who receives the assets, and the amount owed is typically a percentage of the total value of the inheritance. The percentage can vary depending on the relationship between the deceased and the person who receives the property.
Inheritance tax is levied at the state level. The federal government does not collect inheritance tax.
Which states have inheritance tax?
Currently, these states collect inheritance tax:
- Pennsylvania
- Maryland
- Nebraska
- Kentucky
- New Jersey
In most of these states, spouses and children are exempt from inheritance tax.
North Carolina doesn’t have an inheritance or estate tax
Good news for North Carolinians! The state doesn’t have an inheritance tax. The inheritance tax rate is 0%.
North Carolina also doesn’t have a state estate tax.
However, this doesn’t mean that estates are entirely free from taxes. Let’s take a look at the federal estate tax and other potential tax obligations that might apply.
Federal estate tax: Applicability and requirements
Even though North Carolina doesn’t have an inheritance tax, your estate may be subject to federal estate tax if the value of the estate is high enough.
Federal estate tax threshold
If the gross estate (the total value of all assets owned at the time of death) exceeds a certain amount, the federal government may tax the estate. For 2025, that threshold is $13.99 million.
Form 706: Federal Estate Tax Return
If the value of the gross estate is higher than the exemption amount, the executor will have to file Form 706, the Federal Estate Tax Return. To complete this form, you’ll need accurate valuations and records for all the estate’s assets.
Gift tax considerations
It’s also worth knowing that past gifts can affect the estate’s federal estate tax liability. The annual gift exclusion is $16,000. So, you’ll want to review financial records for past gifts that might affect federal estate tax.
Income Tax Obligations: Final and Estate Returns
Even after someone dies, there are still tax obligations that must be fulfilled.
Final Individual Income Tax Return (Form 1040)
The executor of the estate is responsible for filing the deceased person’s final income tax return using IRS Form 1040. This return covers any income the person earned up to the date of their death.
Estate Income Tax Return (Form 1041)
The estate may also be required to file an income tax return using IRS Form 1041. This form is required if the estate’s gross income is more than $600.
This form reports any income earned by the estate after the person’s death.
Capital Gains and the Stepped-Up Basis
Here’s something that might make you feel a little better: inherited assets usually get a “stepped-up basis.” This means that for tax purposes, the asset’s value is reset to its fair market value on the date of the deceased’s death.
Why does this matter? Let’s say you inherit stock that your mom bought for $10 a share, and it’s worth $100 a share when she passes away. If you sell it for $110 a share, you’ll only pay capital gains taxes on the $10 difference between the stepped-up basis ($100) and the selling price ($110), not the $100 difference between your mom’s original purchase price and the selling price.
Getting an accurate valuation of the asset at the time of death is crucial for determining the correct stepped-up basis and minimizing your potential tax liability.
Executor Responsibilities
If you are named as the executor of an estate, it’s your job to handle all tax matters. This includes paying any outstanding taxes before distributing assets to the heirs.
Because estate tax laws can be complicated, consider getting professional tax advice from a qualified attorney or tax advisor. This is especially important if the estate holds assets in a trust or if the estate is large enough to potentially owe federal estate taxes.
In Conclusion
North Carolina residents, take note: the state doesn’t have its own inheritance or estate tax. However, your estate may still be subject to federal estate taxes, so be sure to check the current federal regulations.
Navigating estate administration can be complex. When in doubt, seek professional guidance to ensure you understand all applicable tax obligations.