Let’s be real: inheriting money should feel like good news, not a tax nightmare. Yet if you’re in Washington State, you’ve probably heard confusing rumors about inheritance taxes, estate taxes, and whether you’re about to lose a chunk of what someone left you. The truth? Washington State has no inheritance tax—but there’s a federal estate tax that might apply, and a state-level capital gains tax that could affect inherited investments. Understanding the difference between these three things will save you thousands and help you keep more of what you inherit.
This guide breaks down everything you need to know about Washington state inheritance tax rules, planning strategies, and common mistakes that cost families real money. Whether you’re an heir, an executor, or someone planning ahead, you’ll walk away knowing exactly what you owe and what you don’t.
Washington State Has No Inheritance Tax—Here’s What That Means
This is the headline that matters: Washington does not have a state inheritance tax. You won’t file a Washington inheritance tax return, you won’t owe the state money on inherited assets, and you won’t get surprise bills from Olympia. That’s genuinely good news and puts Washington ahead of roughly a dozen other states that still collect inheritance taxes.
But—and this is important—no state inheritance tax doesn’t mean you’re off the hook completely. It means you’re off the hook with Washington State specifically. The federal government, however, is a different story. According to the IRS Estate and Gift Tax page, estates larger than $13.61 million (in 2024) face federal estate tax at a 40% rate. That’s not a state tax, but it’s federal, and it absolutely applies to Washington residents.
Think of it like this: Washington State is saying “we’re not taking a cut,” but Uncle Sam might still show up with his hand out. The distinction matters because it shapes your planning strategy.
Pro Tip: If you’re inheriting in Washington, your first question should be whether the total estate exceeds the federal threshold. If it doesn’t, you’re likely in the clear from a tax perspective—though you’ll still need to file final income tax returns for the deceased.
Federal Estate Tax: The Real Threat to Large Estates
Here’s where most people get confused: federal estate tax is separate from inheritance tax, and it applies to the estate (the total value of everything the deceased owned), not to individual heirs. The estate pays the tax before assets are distributed, which means it reduces what you actually inherit.
In 2024, the federal estate tax exemption is $13.61 million. If your deceased relative’s estate is worth less than that, there’s no federal estate tax. If it’s more, the excess gets taxed at 40%. Let’s say someone leaves behind a $20 million estate: the first $13.61 million is exempt, and the remaining $6.39 million gets hit with a 40% tax—that’s roughly $2.56 million going to the feds.
Here’s the catch: This exemption is temporary. It’s set to drop to roughly $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress acts. If you’re planning an estate or you’re an heir to a large one, this deadline matters.
According to Investopedia’s estate tax explainer, most Americans don’t face this tax because their estates fall below the threshold. But if you’re in Washington State with significant assets—real estate, investment accounts, business interests—you need to know whether the exemption applies to you.
The federal estate tax form is Form 706, filed with the IRS. Executors are responsible for filing it if the estate exceeds the exemption threshold. Missing this deadline or filing incorrectly can trigger audits and penalties, so this isn’t a DIY situation for large estates.
Washington’s Capital Gains Tax: The Hidden Inheritance Surprise
Okay, here’s where Washington State does take a cut, and it’s the part most people miss. Washington has a capital gains tax that took effect in 2022. It applies to the sale of long-term capital assets (stocks, bonds, real estate, business interests) with gains over $250,000 in a single year.
The rate is 7%, which sounds modest until you realize it applies to gains, not the full value. Here’s a practical example: Your parent leaves you a rental property worth $500,000. They bought it 30 years ago for $100,000. That $400,000 gain is a long-term capital gain. If you sell it within a year of inheriting, you’d owe capital gains tax on that $400,000 gain (minus the $250,000 threshold, so $150,000 × 7% = $10,500 to Washington).
But here’s the silver lining: inherited assets get a “step-up in basis” at the time of death. That means the $100,000 original purchase price becomes $500,000 (the fair market value on the date of death) for tax purposes. If you sell the property immediately after inheriting, there’s virtually no taxable gain because your new basis is already at the sale price.
This is huge. It’s the reason inheriting appreciated assets is often better than receiving them as gifts during someone’s lifetime. More on this in a moment.
According to the Washington Department of Revenue’s capital gains tax guidance, there are exemptions for certain types of gains (like primary residence sales), but inherited investment accounts and real estate are generally subject to the tax if you sell them and trigger gains over the threshold.
Warning: If you’re holding inherited appreciated assets and planning to sell, timing matters. Selling in a year when you have other income or capital gains could push you over the $250,000 threshold and trigger the 7% tax. Consider spreading sales across multiple years if possible.
Step-Up in Basis: Your Secret Weapon
This is the most underrated tax break in American tax law, and it applies to Washington residents just like everyone else. When someone dies and you inherit their assets, the IRS resets the “basis” (the original cost for tax purposes) to the fair market value on the date of death.
Why does this matter? Because it eliminates all the built-up gains that accumulated during the deceased’s lifetime. You inherit the asset at its current value, not its historical cost. If your grandparent bought Apple stock for $100 in 1985 and it’s worth $200,000 when they die, your new basis is $200,000. If you sell it the next day, you owe zero capital gains tax.
This is why inheriting appreciated assets is better than receiving them as gifts. If someone gifts you that same Apple stock while they’re alive, your basis stays at $100, and you’d owe capital gains tax on the $199,900 gain when you sell.
The step-up basis applies to nearly all inherited assets: stocks, bonds, real estate, mutual funds, even cryptocurrency. The only major exception is retirement accounts (IRAs, 401(k)s), which come with their own tax rules.
According to the IRS Publication 559 (Survivors, Executors, and Administrators), the step-up basis is calculated as of the date of death or, if the estate qualifies, six months later (called the “alternate valuation date”). Executors should get professional appraisals for significant assets to document the step-up basis value.
This is also why the timing of large gifts versus inheritance planning matters. If you’re helping a parent plan their estate and they’re considering giving you money or assets, they should understand that gifts don’t get the step-up basis benefit. Inheritance does.
Smart Planning Strategies to Minimize Taxes
If you’re planning an estate in Washington or you’re an heir trying to minimize taxes on what you’re inheriting, here are the strategies that actually work:
- Maximize the Federal Estate Tax Exemption: If your estate is under $13.61 million (2024), you don’t need complex strategies. If it’s over, work with an estate attorney to use both spouses’ exemptions (if married), set up trusts, or make strategic gifts within the annual and lifetime gift tax limits. This is not DIY territory.
- Use Qualified Personal Residence Trusts (QPRTs): If you own a valuable home, a QPRT lets you transfer it at a discounted value for estate tax purposes while you retain the right to live in it for a set period. This is advanced planning, but it can save hundreds of thousands in estate taxes.
- Consider a Charitable Remainder Trust (CRT): If you want to leave money to charity and get income during your lifetime, a CRT can reduce estate taxes while providing a charitable deduction. It’s a win-win if philanthropy is part of your plan.
- Leverage Life Insurance in an Irrevocable Life Insurance Trust (ILIT): Life insurance proceeds are usually tax-free to beneficiaries, but they’re included in your taxable estate. An ILIT removes them from your estate, reducing taxes. This works especially well for business owners.
- Sell Appreciated Assets Before Death: If you own highly appreciated assets and your estate is close to the federal threshold, selling them during your lifetime (and paying capital gains tax) might be smarter than letting your heirs inherit them. Counterintuitive? Yes. But the math works sometimes.
- Implement Annual Gifting: You can give up to $18,000 per person (2024) per year tax-free. If you’re married, that’s $36,000 per recipient. Over 10 years, you can transfer $360,000+ to heirs without touching your exemption. It reduces your taxable estate and gets money to loved ones while you’re alive.
Here’s the reality: most of these strategies require professional help. An estate attorney and a CPA should be your partners, not optional luxuries. The cost of good planning (usually $1,500–$5,000) is nothing compared to the taxes you’ll save.
What Executors Need to Know About Taxes
If you’ve been named executor of an estate in Washington, you have tax responsibilities that start immediately and continue for months (or years, in complex cases). Here’s what you need to handle:
- File the Deceased’s Final Income Tax Return: Even if the deceased had little income, you must file a final 1040 for the year they died. This is due by the normal April deadline.
- File Estate Income Tax Returns (Form 1041): If the estate generates income (interest, dividends, rental income) during the probate process, you file Form 1041 annually until the estate closes. This is required if the estate has over $600 in income.
- File Form 706 (Federal Estate Tax Return) if Required: If the estate exceeds $13.61 million, you must file Form 706 within nine months of death (with a possible extension). This is not optional, and missing the deadline triggers penalties.
- Obtain an EIN for the Estate: The estate gets its own tax ID (separate from the deceased’s SSN). You’ll need this for all estate tax filings. Learn more about Tax Identification Numbers here.
- Track Basis for Inherited Assets: Document the step-up basis value for all inherited assets. This protects heirs if they sell assets later and the IRS questions the gain calculation.
- File Washington State Estate Tax Return (if applicable): Washington has no state estate tax, so you don’t file a state-level Form 706 equivalent. But you do need to understand the state’s capital gains tax rules for inherited assets.
- Issue K-1s to Beneficiaries: If the estate has income, beneficiaries receive K-1 forms showing their share of estate income. They report this on their personal tax returns.
Pro tip: Executors are personally liable for unpaid taxes. If you distribute assets to beneficiaries without paying taxes owed, you could be on the hook. Always set aside funds for potential tax liability before distributing the estate.
Common Mistakes That Cost Heirs Money
After years of seeing families navigate inheritance, here are the mistakes that show up most often—and how to avoid them:
Mistake #1: Not Understanding the Step-Up Basis – Heirs sell inherited appreciated assets without realizing they get a fresh basis at death. They pay capital gains tax on gains that should have been eliminated. Solution: Talk to a CPA before selling any inherited investment or real estate.
Mistake #2: Holding Inherited Appreciated Assets Too Long – If you inherit an asset with a huge step-up basis and hold it for years, any appreciation after the inheritance date becomes a new taxable gain. If you’re going to sell, do it sooner rather than later to lock in the step-up benefit.
Mistake #3: Treating Inherited Retirement Accounts Like Regular Accounts – Inherited IRAs and 401(k)s have different rules than other inherited assets. The SECURE Act (2020) changed the game for most non-spouse beneficiaries, requiring distributions within 10 years. Mistakes here mean missed deadlines and penalties. Get professional help immediately if you inherit a retirement account.
Mistake #4: Not Filing Required Tax Returns – Executors sometimes skip filing the final 1040 or Form 1041 because they think there’s no tax owed. The IRS doesn’t care. Missing filings trigger penalties and interest, even if no tax is ultimately due.
Mistake #5: Ignoring the Federal Estate Tax Threshold – Families with estates over $13.61 million sometimes assume they don’t need to file Form 706 if they think they’ll owe no tax. Wrong. Filing is required regardless, and missing the deadline can be catastrophic for tax planning.
Mistake #6: Comingling Estate Assets with Personal Assets – If you’re an executor and you mix estate money with your own, the IRS can question whether distributions were gifts or loans, and whether the estate paid taxes on distributions. Keep everything separate.
Mistake #7: Forgetting About State Taxes – While Washington has no inheritance tax, if the deceased lived or owned property in other states, those states might have their own taxes. Multi-state estates need multi-state planning.
The common thread? These mistakes happen when people try to handle inheritance taxes alone. An hour with a CPA or estate attorney typically prevents all of these.
Frequently Asked Questions
Does Washington State have an inheritance tax?
– No. Washington State has no inheritance tax. You will not owe the state any tax on inherited assets. However, federal estate tax may apply if the estate exceeds $13.61 million in 2024, and the state’s 7% capital gains tax may apply if you sell inherited appreciated assets.
Do I have to pay taxes on money I inherit?
– Not on the inheritance itself. Inherited money is not income to the recipient. However, if the inherited assets generate income (dividends, interest, rental income) after you receive them, that income is taxable. Additionally, if you sell inherited appreciated assets and trigger gains, the capital gains tax applies (though the step-up basis usually eliminates this).
What is the step-up in basis and why does it matter?
– The step-up in basis resets the tax cost basis of inherited assets to their fair market value on the date of death. This eliminates all built-up gains. If you inherit a stock worth $200,000 that was bought for $50,000, your new basis is $200,000. If you sell it immediately, you owe zero capital gains tax. This is a massive tax benefit of inheriting versus receiving gifts.
Will I owe federal estate tax on my inheritance?
– Only if the total estate exceeds $13.61 million in 2024. The estate pays the tax (not individual heirs), and it reduces the amount available for distribution. Most Americans don’t face federal estate tax because their estates are below the threshold. However, this exemption is set to drop significantly in 2026.
What is the Washington State capital gains tax and does it apply to inherited assets?
– Washington’s 7% capital gains tax applies to long-term capital gains over $250,000 in a single year. It can apply to inherited assets if you sell them and trigger gains. However, the step-up basis usually eliminates taxable gains on inherited assets sold soon after death.
Do I need to file a tax return for the person who died?
– Yes. A final 1040 must be filed for the year of death, even if the deceased had little income. Additionally, if you’re the executor and the estate generates income during probate, you must file Form 1041 (estate income tax return) annually.
What is Form 706 and do I have to file it?
– Form 706 is the federal estate tax return. It’s required only if the estate exceeds $13.61 million in 2024. It must be filed within nine months of death. Missing the deadline has serious consequences, even if no tax is ultimately owed.
Can I reduce my estate taxes by making gifts now?
– Yes. You can give up to $18,000 per person per year (2024) tax-free. Married couples can give $36,000 per recipient. These gifts reduce your taxable estate and don’t count against your lifetime exemption. This is a straightforward way to transfer wealth and reduce estate taxes simultaneously.
What happens if I inherit a retirement account like an IRA?
– Inherited retirement accounts have special rules. Most non-spouse beneficiaries must withdraw all funds within 10 years (under the SECURE Act). These distributions are taxable income. Mistakes here are costly, so consult a CPA or financial advisor immediately.
Is there a Washington State estate tax?
– No. Washington has no state-level estate tax. However, it does have a federal estate tax (which applies nationwide), and it has a 7% capital gains tax that may apply to inherited appreciated assets if you sell them.
How long do I have to file taxes for an estate?
– The final 1040 for the deceased is due by April 15 of the year following death (with possible extension). Form 706 (if required) is due within nine months of death. Form 1041 (estate income tax) is due annually as long as the estate generates income during probate, typically until the estate closes (which can take 6 months to 2+ years).
What records do I need to keep as an executor for tax purposes?
– Keep the death certificate, all asset valuations (for step-up basis documentation), bank statements, investment account statements, mortgage documents, and any appraisals. Document the fair market value of all inherited assets on the date of death. Keep all tax returns filed (final 1040, Form 706, Form 1041) for at least seven years.