Inheritance Tax Illinois: Ultimate 2024 Guide to Avoid Costly Mistakes

Here’s the good news: Illinois has no inheritance tax. Unlike Pennsylvania, New Jersey, and a handful of other states, Illinois residents don’t owe state-level taxes when they inherit money, property, or assets. But before you breathe that sigh of relief, there’s a catch—and it’s an important one we need to unpack together.

Illinois Has No Inheritance Tax

Let’s start with the headline: Illinois does not have an inheritance tax or a state estate tax. This puts Illinois in a favorable position compared to states like Pennsylvania, which has a 4.5% to 15% inheritance tax, or New Jersey, which imposes both an estate and inheritance tax. If you live in Illinois and inherit from someone, you won’t receive a bill from the Illinois Department of Revenue for that inheritance.

This is a massive advantage for Illinois residents. When a loved one passes away and leaves you their assets, you can focus on grieving and settling their affairs rather than worrying about state tax liability. However—and this is crucial—the absence of state inheritance tax doesn’t mean you’re completely tax-free. Federal taxes and income tax considerations still apply, and that’s where most people stumble.

Federal Estate Tax Still Applies

Here’s where things get real. While Illinois doesn’t tax inheritances at the state level, the federal government absolutely does—but only if your inheritance is large enough. The federal estate tax exemption for 2024 is $13.61 million per person (or $27.22 million for married couples filing jointly). If the deceased person’s estate exceeds these thresholds, the federal government taxes the excess at 40%.

Most Illinois residents will never hit this threshold. If your parent leaves you $500,000, you’re in the clear. If your great-aunt leaves you her modest home and $100,000 in savings, no federal estate tax applies. The exemption is genuinely generous—but here’s the catch: this exemption expires on December 31, 2025. After that date, it’s scheduled to drop to roughly $7 million per person unless Congress acts.

For high-net-worth families, this is a critical planning issue. If your family’s combined assets exceed $13.61 million in 2024, or if you expect the exemption to drop in 2025, you need to talk to an estate planning attorney or CPA before December 31, 2025. Strategies like lifetime gifts, irrevocable life insurance trusts, and spousal lifetime access trusts (SLATs) can help reduce your federal estate tax burden.

Step-Up in Basis Explained

Here’s a tax concept that actually works in your favor: the step-up in basis. When someone dies, their assets receive a “stepped-up” cost basis equal to the asset’s fair market value on the date of death. This is huge.

Let me show you why. Suppose your grandmother bought a house in 1980 for $50,000. When she passes away in 2024, that house is worth $400,000. If she had sold it during her lifetime, she would have owed capital gains tax on the $350,000 gain. But because she held it until death, you inherit it with a stepped-up basis of $400,000. If you immediately sell it for $400,000, you owe zero capital gains tax.

This applies to stocks, bonds, real estate, business interests, and most other assets. The only major exception is retirement accounts (IRAs, 401(k)s), which don’t receive a step-up in basis. This is one of the biggest reasons wealthy families hold appreciating assets outside of retirement accounts—the step-up in basis at death is incredibly valuable.

Income Tax on Inherited Assets

Most inherited assets are not subject to income tax. You inherit your grandmother’s jewelry, your uncle’s car, or your aunt’s investment portfolio, and you don’t owe income tax on the inheritance itself. This is true in Illinois and across the entire United States.

However—there’s always a however—income generated by inherited assets is taxable. If you inherit a rental property, the rental income you collect is subject to income tax. If you inherit a bond portfolio, the interest income is taxable. If you inherit a business, the business income is taxable. The inheritance itself is tax-free; the ongoing income from that inheritance is not.

This distinction confuses a lot of people. You inherit $100,000 in stocks: no income tax. The stocks pay $2,000 in dividends the following year: you owe income tax on that $2,000. You inherit a rental property: no income tax. The property generates $15,000 in annual rent: you owe income tax on that $15,000 (minus deductible expenses like rental property tax deductions).

Inherited Retirement Accounts

Inherited IRAs and 401(k)s follow special rules that are more complex than regular inherited assets. First, the good news: you don’t owe income tax on the inheritance itself. But here’s the bad news: you must take distributions from inherited retirement accounts, and those distributions are fully taxable as ordinary income.

The rules changed in 2020 with the SECURE Act. If you inherit a traditional IRA or 401(k) from someone who isn’t your spouse, you generally must drain the account within 10 years. The exact timeline depends on whether the account owner had started taking required minimum distributions (RMDs) before death, but most non-spouse beneficiaries must complete withdrawals by December 31 of the year containing the tenth anniversary of the account owner’s death.

Spouse beneficiaries have more flexibility—they can roll the account into their own IRA and treat it as their own. Non-spouse beneficiaries cannot do this. If you inherit a $500,000 IRA and must distribute it over 10 years, you’ll have roughly $50,000 in taxable distributions annually, which could push you into a higher tax bracket.

This is one of the biggest gotchas in inheritance planning. Many people don’t realize the tax implications of inherited retirement accounts until they’re hit with a massive tax bill. If you’re expecting to inherit a retirement account, talk to a CPA or tax advisor about your options.

Property & Real Estate Inheritance

Inheriting real estate in Illinois comes with some unique considerations. First, the good news: you get that stepped-up basis we discussed earlier. If your parent bought their home for $100,000 in 1990 and it’s worth $500,000 when they pass, you inherit it with a $500,000 basis. If you sell immediately, no capital gains tax.

Second, Illinois has relatively favorable property tax laws for inherited property. There’s no special “inheritance property tax” in Illinois. You’ll owe the standard property tax based on the home’s assessed value, just like any homeowner. However, some homeowners may qualify for homestead exemptions or other property tax relief programs, so it’s worth checking with your local assessor’s office.

Third, be aware of title and deed issues. When you inherit property, you’ll need to file the proper documents with your county recorder’s office to transfer title into your name. This typically involves an affidavit of heirship or a court order from probate proceedings. Don’t skip this step—it’s essential for selling the property later or refinancing any mortgage.

If you inherit rental property, remember that the rental income is taxable. You can deduct operating expenses, property taxes, insurance, maintenance, and depreciation, but the net income is yours to report on your tax return.

Executor & Administrator Duties

If you’re named as the executor or administrator of an estate in Illinois, you have legal responsibilities that carry tax implications. You must file the deceased person’s final income tax return, any outstanding state returns, and potentially a federal estate tax return (Form 706) if the estate exceeds the federal exemption.

As executor, you’re personally liable for unpaid taxes, debts, and other obligations of the estate. This is why it’s critical to understand the tax situation before distributing assets to beneficiaries. Many executors have made the mistake of distributing all assets and then discovering a tax bill they can’t pay.

Illinois law gives you time to settle the estate—there’s no strict deadline, though probate typically takes 6 months to 2 years depending on complexity. During this period, you should gather all financial documents, identify all assets and liabilities, and consult with a CPA or tax attorney about potential tax issues.

One often-overlooked issue: the estate itself may owe income tax if it generates income during the settlement period. If the estate holds investments that pay dividends or interest, or if it owns a business or rental property, the estate files its own tax return (Form 1041) and pays tax on that income.

Estate Planning Strategies

If you’re in Illinois and thinking about your own estate, or if you’re trying to minimize taxes on a large inheritance you’re about to receive, here are some legitimate strategies:

1. Lifetime Gifting: You can gift up to $18,000 per person per year (in 2024) without filing a gift tax return. Married couples can gift $36,000 per recipient annually. These gifts don’t count against your federal estate tax exemption. If you have significant wealth, making annual gifts to your children or grandchildren can reduce your taxable estate.

2. Irrevocable Life Insurance Trusts (ILITs): Life insurance proceeds are normally included in your taxable estate. By placing a life insurance policy in an ILIT, you can keep the proceeds out of your estate, potentially saving 40% in federal estate tax. This strategy requires careful planning and is only worthwhile for larger estates.

3. Charitable Remainder Trusts (CRTs): If you’re charitably inclined, a CRT allows you to donate assets to charity while receiving income during your lifetime. You get an immediate charitable deduction, and the charity eventually receives the assets. This is particularly useful if you own appreciated assets—you can avoid capital gains tax while supporting causes you care about.

4. Spousal Lifetime Access Trusts (SLATs): For married couples, a SLAT allows one spouse to make a large gift to an irrevocable trust for the other spouse’s benefit. The gift uses your exemption, but you can still benefit from the trust assets indirectly. This is complex but powerful for high-net-worth couples.

5. Business Succession Planning: If you own a business, proper planning can pass it to the next generation with minimal tax impact. This might involve buy-sell agreements, family limited partnerships, or intentionally defective grantor trusts (IDGTs).

Mistakes to Avoid

After years of working with clients on inheritance issues, I’ve seen these mistakes repeatedly:

Mistake #1: Ignoring the deadline for inherited retirement accounts. The 10-year distribution deadline is firm. Missing it means penalties and accelerated taxation. Set a calendar reminder now if you’ve inherited an IRA or 401(k).

Mistake #2: Not getting a stepped-up basis valuation. When someone dies, you need a professional appraisal of their assets as of the date of death. This establishes your stepped-up basis. Without it, the IRS might challenge your basis later if you sell. Get appraisals for real estate, artwork, jewelry, and other significant assets.

Mistake #3: Failing to file the final return. Even if the deceased person’s income was below the filing threshold, filing a final return might result in a refund. Don’t leave money on the table.

Mistake #4: Not considering the step-up in basis when deciding what to inherit. If you’re dividing an estate among multiple heirs, consider who should get appreciated assets. Someone in a high tax bracket might be better off inheriting cash, while someone in a lower bracket could inherit appreciated assets and sell them with minimal tax impact.

Mistake #5: Mixing personal and business finances as a business owner. This creates a nightmare for your heirs. Keep clean records, maintain separate accounts, and have a succession plan in place. Your heirs will thank you.

Mistake #6: Waiting until it’s too late to plan. If you’re healthy and have significant assets, start planning now. The best time to minimize taxes is before death, not after. Once someone passes, your options become much more limited.

Illinois vs. Other States

To appreciate Illinois’s favorable tax position, let’s compare it to nearby states. California has no state inheritance or estate tax, similar to Illinois. However, Pennsylvania imposes an inheritance tax ranging from 4.5% to 15% depending on the beneficiary’s relationship to the deceased. New Jersey has both an estate tax (up to 16%) and an inheritance tax (up to 16%).

This is why some wealthy families consider moving to Illinois or California in retirement—the tax savings can be substantial. If you’re inheriting from someone in a high-tax state, you might actually owe that state’s inheritance tax even if you live in Illinois. The tax liability typically follows the deceased person’s domicile at death, not the beneficiary’s residence.

If you’ve recently moved to Illinois from another state, or if you’re considering a move, talk to a tax professional about the implications. State income tax, property tax, and inheritance tax all factor into the decision.

Frequently Asked Questions

Do I owe taxes on an inheritance in Illinois?

Illinois has no state inheritance tax, so you won’t owe state taxes on the inheritance itself. However, federal estate tax may apply if the deceased person’s estate exceeded $13.61 million in 2024. Additionally, any income generated by inherited assets (dividends, interest, rental income) is taxable.

What is the step-up in basis, and why does it matter?

When someone dies, inherited assets receive a “stepped-up” cost basis equal to their fair market value on the date of death. This means if you inherit an asset that appreciated significantly, you can sell it immediately with no capital gains tax. This is one of the most valuable tax benefits in the entire tax code.

Do I have to pay taxes on inherited retirement accounts?

The inheritance itself is not taxable, but distributions from inherited IRAs and 401(k)s are fully taxable as ordinary income. Non-spouse beneficiaries must generally distribute the entire account within 10 years of the account owner’s death.

What happens if I inherit real estate in Illinois?

You inherit the property with a stepped-up basis equal to its fair market value on the date of death. You’ll owe standard property taxes but no special inheritance tax. If the property is rental property, rental income is taxable. You’ll need to file the proper documents with your county recorder’s office to transfer title into your name.

Is there a deadline for settling an estate in Illinois?

Illinois law doesn’t impose a strict deadline, but probate typically takes 6 months to 2 years. During this time, the executor must file the deceased person’s final tax return and any estate tax returns if required.

Can I reduce my estate taxes through planning?

Yes. Strategies include annual gifting (up to $18,000 per person per year), irrevocable life insurance trusts, charitable remainder trusts, and spousal lifetime access trusts. However, the federal exemption is scheduled to drop from $13.61 million to approximately $7 million on January 1, 2026, so time is running out for current planning.

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

An estate tax is paid by the deceased person’s estate before assets are distributed to heirs. An inheritance tax is paid by the heirs on the assets they receive. Some states have one, some have both, and some (like Illinois) have neither.

Do I need to hire a lawyer or CPA to handle an inheritance?

It depends on the complexity of the estate. Simple estates with minimal assets might not require professional help. However, if the estate includes real property, a business, significant investments, or if there’s any family conflict, professional guidance is highly recommended. The cost of professional help is usually far less than the tax savings and headaches avoided.

Conclusion

Inheriting money or assets is often bittersweet—you’re gaining financial resources while grieving a loss. The last thing you want is to stumble into unexpected tax bills because you didn’t understand the rules. The good news is that Illinois’s lack of inheritance tax puts you ahead of residents in many other states. The challenge is navigating federal taxes, income tax on inherited assets, and the special rules for retirement accounts.

Remember: the inheritance itself is tax-free in Illinois, but the income it generates isn’t. Assets receive a stepped-up basis at death, which is incredibly valuable. Inherited retirement accounts have strict distribution rules. And if you’re planning your own estate, the window for minimizing federal estate taxes is closing—the exemption drops significantly on January 1, 2026.

Take action now. If you’ve inherited something substantial, talk to a CPA or tax attorney. If you’re planning your own estate, don’t wait. The best inheritance planning happens before death, not after. Your heirs will thank you for the clarity and the tax savings.