Inheritance Tax Virginia: Essential 2024 Guide to Save

Good news: inheritance tax Virginia doesn’t exist. Virginia is one of the fortunate states with no inheritance tax, meaning you won’t owe state taxes when you inherit money, property, or assets from a deceased relative. However, that doesn’t mean your inheritance is completely tax-free—federal estate taxes, income taxes on inherited assets, and other considerations still apply. Let’s walk through what you actually need to know about inheriting in Virginia and how to keep more of what you receive.

Virginia Has No State Inheritance Tax

Virginia joined a select group of states that don’t impose an inheritance tax or estate tax. This is genuinely advantageous if you’re inheriting from a Virginia resident or receiving Virginia-based assets. Unlike states such as New Jersey, Pennsylvania, or Kentucky that tax inheritances, Virginia beneficiaries don’t file a separate state inheritance tax return or pay state taxes on what they inherit.

That said, don’t confuse the absence of Virginia’s inheritance tax with complete tax freedom. The IRS still has a say, and depending on the estate’s size and the type of assets you inherit, federal taxes may apply. Think of Virginia’s lack of inheritance tax as one layer of protection—but there are other layers to understand.

Federal Estate Tax Still Applies

While Virginia won’t tax your inheritance, the federal government might. Federal estate tax kicks in when a deceased person’s total estate exceeds the exemption threshold. For 2024, that threshold is $13.61 million per individual (or $27.22 million for married couples filing jointly). If the estate is smaller than that, no federal estate tax is owed.

Here’s the catch: that exemption amount is scheduled to drop significantly after December 31, 2025. Unless Congress acts, it will fall to approximately $7 million per person in 2026. If you’re dealing with a large estate, timing matters. An experienced estate planning attorney or tax professional can help you understand whether federal estate taxes will apply to your specific situation.

The executor of the estate (usually named in the will) is responsible for filing the federal estate tax return (Form 706) if the estate exceeds the exemption. This isn’t your direct responsibility as a beneficiary, but it affects how much you ultimately receive.

Income Tax on Inherited Assets

Here’s where many people get confused: inheriting money or property itself isn’t taxable income. You don’t report the inheritance on your personal income tax return. However, income generated by inherited assets is taxable.

For example, if you inherit a rental property, you’ll owe income tax on the rental income you collect. If you inherit a brokerage account with dividend-paying stocks, those dividends are taxable income to you. If you inherit a savings account earning interest, that interest is taxable. The key distinction: the inheritance itself is tax-free, but the earnings from that inheritance are not.

This is where the step-up in basis (discussed below) becomes your best friend, because it reduces the taxable gain when you eventually sell inherited property.

Property Basis Step-Up Benefit

One of the most valuable tax breaks for inheritors is the step-up in basis. Here’s how it works: when someone dies and you inherit property, the property’s tax basis is automatically adjusted to its fair market value on the date of death. This is huge.

Let’s say your grandmother bought a house in 1980 for $50,000. It’s now worth $400,000. If she had sold it before dying, she would have owed capital gains tax on the $350,000 gain. But because you inherited it, your basis is stepped up to $400,000—the value on the date she died. If you sell it the next day for $400,000, you owe zero capital gains tax. The entire gain that accumulated during her lifetime disappears from a tax perspective.

This step-up applies to most inherited property: real estate, stocks, bonds, mutual funds, and other appreciated assets. It does not apply to inherited retirement accounts like IRAs or inherited savings accounts (which already had their tax basis established). The step-up is one reason why inheriting appreciated assets can be financially advantageous compared to receiving a cash gift during someone’s lifetime.

Inherited Retirement Accounts

Inherited IRAs and 401(k)s follow different rules than other inherited assets, and they’re where many beneficiaries face unexpected tax bills. When you inherit a traditional IRA or 401(k), the distributions you take are subject to income tax. If you inherit a Roth IRA, qualified distributions are tax-free, but non-qualified distributions may be taxable.

The SECURE Act (passed in 2019) changed the game for most non-spouse beneficiaries. You generally must withdraw the entire inherited IRA balance within 10 years of the account owner’s death. This “10-year rule” can create a significant tax burden if you withdraw everything in the final year, pushing you into a higher tax bracket.

If you’re a surviving spouse, you have more flexibility—you can treat the inherited IRA as your own or roll it into an IRA in your name. If you’re an adult child or other non-spouse beneficiary, consult a tax professional immediately after inheriting a retirement account. The withdrawal strategy matters significantly for your tax bill.

Estate Planning Strategies

If you’re anticipating an inheritance or planning your own estate, several strategies can minimize taxes for your beneficiaries. These aren’t just for the ultra-wealthy—they benefit middle-class families too.

Irrevocable Life Insurance Trusts (ILITs): Life insurance proceeds are typically excluded from the taxable estate if owned by an ILIT rather than the individual. This keeps a significant amount of money outside the federal estate tax calculation.

Charitable Remainder Trusts: If you want to leave money to both charity and family, a charitable remainder trust can provide income to beneficiaries during their lifetime, with the remainder going to charity. This reduces the taxable estate while supporting causes you care about.

Spousal Lifetime Access Trusts (SLATs): These trusts allow spouses to leverage the annual gift tax exclusion strategically, removing assets from the taxable estate while maintaining some access to funds.

Family Limited Partnerships: For families with significant assets (real estate, business interests, investments), FLPs can provide valuation discounts and allow for gradual wealth transfer to the next generation.

These strategies require professional guidance from an estate planning attorney and a tax advisor. They’re worth discussing if your estate is substantial or if you have complex family situations.

Gift Tax and Annual Exclusions

Virginia doesn’t have a gift tax either, but federal gift tax rules still apply. Many people use gifts during their lifetime as an estate planning tool to reduce their taxable estate. In 2024, you can give up to $18,000 per recipient per year without filing a gift tax return or using any of your lifetime exemption. For married couples, that’s $36,000 per recipient.

Gifts that exceed the annual exclusion use your lifetime gift and estate tax exemption. The current exemption is $13.61 million, but remember—it drops significantly after 2025. If you’re considering large gifts to reduce your estate, the timing is worth discussing with a professional.

The 2025 annual gift tax exclusion may increase slightly due to inflation adjustments, so stay tuned for updates if you’re planning gifts this year.

Virginia Probate Process

While Virginia doesn’t have an inheritance tax, it does have a probate process that affects how and when you receive your inheritance. Virginia probate is relatively straightforward compared to many states, but it still involves court oversight, creditor notification, and asset distribution according to the will or Virginia’s intestacy laws.

If the deceased person left a valid will, the probate process typically takes 4-12 months, depending on the estate’s complexity and whether anyone contests the will. If there’s no will (intestacy), Virginia’s laws determine who inherits and in what order: surviving spouse, then children, then parents, then siblings, and so on.

Virginia allows for simplified probate procedures for smaller estates (under $50,000 in certain cases), which speeds up the process and reduces costs. If you’re an executor managing a Virginia estate, familiarize yourself with these procedures or hire a probate attorney to guide you through them.

Frequently Asked Questions

Do I have to pay taxes on an inheritance in Virginia?

Virginia has no state inheritance tax, so you won’t owe Virginia state taxes on your inheritance. However, you may owe federal estate taxes if the total estate exceeds $13.61 million (2024), and you’ll owe income tax on any earnings generated by inherited assets after you receive them. The inheritance itself is not taxable income.

What’s the difference between an inheritance tax and an estate tax?

An inheritance tax is paid by the person receiving the inheritance (the beneficiary). An estate tax is paid by the estate itself before assets are distributed to beneficiaries. Virginia has neither. The federal government has an estate tax, but it only applies to very large estates exceeding the exemption threshold.

Do I need to report my inheritance on my tax return?

No, the inheritance itself doesn’t go on your tax return. However, if you inherit an asset that generates income (rental property, dividend-paying stocks, interest-bearing accounts), you must report that income on your tax return going forward. Keep records of the asset’s value on the date of death for basis calculations.

Can I avoid taxes by inheriting in Virginia instead of another state?

Partially, yes. Virginia’s lack of state inheritance tax is an advantage over states like New Jersey or Pennsylvania that do tax inheritances. However, your federal tax obligations depend on the estate’s size, not which state you live in. The step-up in basis and other federal rules apply regardless of where you inherit.

What happens if I inherit a business in Virginia?

Inheriting a business is complex. You’ll benefit from the step-up in basis for the business’s tangible assets, but the business structure (S-corp, LLC, C-corp) affects how income is taxed going forward. You’ll also need to understand the business’s liabilities and whether you want to keep operating it or sell it. This definitely warrants consultation with a tax professional and possibly a business attorney.

Are there penalties for not handling an inherited IRA correctly?

Yes. The SECURE Act imposes a 25% penalty on amounts not withdrawn from an inherited IRA by the 10-year deadline (reduced to 10% in certain circumstances). This is in addition to regular income tax on the withdrawal. That’s why getting professional guidance immediately after inheriting a retirement account is critical.

How long do I have to settle an estate in Virginia?

Virginia probate typically takes 4-12 months, though it can be faster for small estates or slower if disputes arise. There’s no strict deadline, but creditors must be notified and given time to file claims (usually 4-6 months). The executor should work diligently to settle the estate, but rushing isn’t always advisable—getting it right matters more than getting it fast.