Yes, an inheritance can be hit with double inheritance tax, and it happens more often than most families expect: federal and state governments can both tax the same estate, two countries can claim the same foreign asset, the same wealth can pass through two estates when relatives die close together, and certain inherited income gets taxed once at the estate level and again as ordinary income. Federal law offers a specific deduction, credit, or election for each of these overlaps, but none of them apply automatically. The executor has to claim them.
When Federal and State Estate Taxes Both Apply
The federal estate tax reaches every U.S. citizen or resident whose taxable estate exceeds $15,000,000 in 2026, with amounts above that threshold taxed at graduated rates reaching 40 percent.1Internal Revenue Service. What’s New – Estate and Gift Tax2Office of the Law Revision Counsel. 26 US Code 2001 – Imposition and Rate of Tax That $15 million figure is the permanent level enacted by the One Big Beautiful Bill Act, replacing the temporary exemption scheduled to sunset after 2025.3Congress.gov. The Generation-Skipping Transfer Tax
The state layer is where most families run into double taxation. Twelve states and the District of Columbia impose estate taxes, five states impose inheritance taxes, and Maryland imposes both. An estate tax is calculated on the total value of the deceased person’s assets; an inheritance tax is calculated on what each beneficiary receives and their relationship to the deceased. State exemption thresholds are often far lower than the federal level, ranging from roughly $1 million to about $14 million. An estate worth $5 million can owe nothing to the IRS and still face a substantial state bill.
Federal law softens the overlap through a deduction rather than a credit. Estates can deduct state death taxes actually paid when calculating the federal taxable estate, which reduces the federal bill by the tax paid to the state.4Office of the Law Revision Counsel. 26 USC 2058 – State Death Taxes The state tax itself is not eliminated, but the same dollars are not fully taxed at both levels. Estates large enough to trigger both federal and state obligations should claim the deduction on Form 706.
The Credit for Tax on Prior Transfers
When two family members die within a short period, the same assets can pass through two taxable estates in rapid succession. A parent leaves property to an adult child, the child’s estate pays federal tax on it, and the child dies a year later leaving the same property on to a grandchild.
The credit for tax on prior transfers lets the second estate offset some or all of the federal estate tax paid on the first transfer.5Office of the Law Revision Counsel. 26 USC 2013 – Credit for Tax on Prior Transfers It applies when the original transferor died within ten years before or two years after the current decedent, and it phases out on a sliding scale:
- Within 2 years: 100 percent of the tax previously paid
- 3rd or 4th year: 80 percent
- 5th or 6th year: 60 percent
- 7th or 8th year: 40 percent
- 9th or 10th year: 20 percent
After ten years, the credit is gone.5Office of the Law Revision Counsel. 26 USC 2013 – Credit for Tax on Prior Transfers The estate claiming the credit has to document the taxes paid during the earlier estate settlement, so those records need to be preserved even after the first estate is closed.
Estate Tax and Income Tax on the Same Dollars
Most inherited property receives a step-up in tax basis to its fair market value on the date of death.6Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent If a parent bought stock for $50,000 and it was worth $300,000 at death, the heir’s basis is $300,000. Selling the next day for $300,000 produces no capital gain. Without the step-up, heirs would pay income tax on gains already included in the estate’s taxable value.
The step-up does not apply to a category called income in respect of a decedent: amounts the deceased had earned or had a right to receive but had not yet been taxed on before death. Unpaid wages, distributions from traditional retirement accounts, deferred compensation, and installment sale payments still coming in all fall into this bucket. When a beneficiary receives these amounts, they include them in gross income for the year received.7Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents The same assets were also included in the deceased person’s gross estate. That produces a genuine double tax: estate tax on the value, plus income tax when the money is received.
The beneficiary who reports the income can deduct the portion of federal estate tax attributable to those specific assets.8Internal Revenue Service. Revenue Ruling 2005-30 The calculation compares the value of the income item the beneficiary received against the total value of all such income items in the estate. It does not always fully eliminate the overlap, but it prevents the worst outcomes. Anyone inheriting a traditional IRA or other tax-deferred account should know about this deduction, because it directly reduces taxable income in the year the distribution is taken.
Foreign Assets Taxed by Two Countries
Property located outside the United States can be claimed by two tax systems at once. The country where the property sits often taxes the transfer based on physical location, and the United States taxes its citizens and residents on their worldwide estates regardless of where specific assets are held. A U.S. citizen with real estate in France may find both governments asserting authority over the same property.
Whether someone is “domiciled” in the United States for estate tax purposes turns on whether the person lived here with no definite intention of leaving, a test that differs from the income tax residency rules based on immigration status and days in the country.9Internal Revenue Service. Internal Revenue Service Manual 4.25.4 – International Estate and Gift Tax Examinations Someone who is a resident for income tax purposes may not be domiciled here for estate tax purposes, or the other way around.
The United States has estate or gift tax treaties with 15 countries, including the United Kingdom, Canada, Germany, France, Japan, and Australia.10Internal Revenue Service. Estate and Gift Tax Treaties – International These treaties allocate primary taxing rights and set tie-breaker rules. For countries without a treaty, federal law provides a foreign death tax credit: taxes paid to the foreign government can offset federal estate tax on the same property.11Office of the Law Revision Counsel. 26 US Code 2014 – Credit for Foreign Death Taxes The credit is capped at the lesser of the actual foreign tax paid or the proportion of federal tax attributable to the foreign property.
Even with treaties and credits, international estates face practical friction. The situs of intangible assets like brokerage accounts or intellectual property can be contested. Two countries may use different valuation dates or methods on the same asset. Foreign tax authorities do not coordinate their filing timelines with the IRS, so executors should expect to work through each country’s requirements independently.
Spousal Deferral: Marital Deduction and Portability
For married couples, two federal tools can defer or eliminate the first layer of estate tax entirely. Any property passing from the deceased to a surviving spouse is fully deductible from the gross estate under the unlimited marital deduction, meaning no federal estate tax is owed on that transfer regardless of amount.12Office of the Law Revision Counsel. 26 USC 2056 – Bequests to Surviving Spouse This defers rather than eliminates the tax. When the surviving spouse dies, the combined assets are subject to tax at that point.
The marital deduction is disallowed for property passing to a non-citizen spouse unless it goes through a qualified domestic trust, which preserves the IRS’s jurisdiction to collect tax when distributions are made.12Office of the Law Revision Counsel. 26 USC 2056 – Bequests to Surviving Spouse If the surviving spouse becomes a U.S. citizen before the estate tax return is filed and was a resident throughout, the standard deduction applies.
Portability lets the first spouse’s unused $15 million exclusion transfer to the surviving spouse, giving a married couple up to $30 million in combined exemption.13Office of the Law Revision Counsel. 26 US Code 2010 – Unified Credit Against Estate Tax Portability is not automatic. The executor of the first spouse’s estate must file Form 706 and make an irrevocable election, even when no tax is owed. Skipping the filing forfeits the unused exemption permanently.
The Generation-Skipping Layer
Leaving assets directly to a grandchild or a more distant descendant can trigger a separate federal tax on top of any estate tax already owed. The generation-skipping transfer tax is designed to capture the revenue that would have been collected if the wealth had passed through the skipped generation first.14Office of the Law Revision Counsel. 26 USC Chapter 13 – Tax on Generation-Skipping Transfers
A “skip person” is anyone two or more generations below the transferor.15Office of the Law Revision Counsel. 26 USC 2613 – Skip Person and Non-Skip Person Defined For family members, that means grandchildren and beyond. For unrelated recipients, generations are measured in 25-year bands, so anyone more than 37.5 years younger than the transferor is a skip person. The rate equals the top federal estate tax rate, currently 40 percent.16Office of the Law Revision Counsel. 26 USC 2641 – Applicable Rate
A separate GST exemption shelters a substantial amount from this second layer. The exemption equals the estate tax basic exclusion, so $15,000,000 per individual in 2026, or up to $30 million for a married couple.17Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption The combined burden of estate tax and GST tax only bites well above those thresholds.
Claiming the Relief: Deadlines and Documentation
None of these protections apply automatically. Every one of them requires the executor to file, elect, or claim.
Form 706 is due nine months after the date of death. An automatic six-month extension is available by filing Form 4768 before the original deadline, but the extension covers filing only, not payment.18Internal Revenue Service. Frequently Asked Questions on Estate Taxes Interest accrues on unpaid tax from the original due date. Missing the filing deadline triggers a penalty of 5 percent of the unpaid tax per month up to 25 percent, and failure to pay adds 0.5 percent per month up to 25 percent.19Taxpayer Advocate Service. Failure to File Penalty Under IRC 6651(a)(1)
Each relief mechanism has its own documentation demand. The prior transfers credit requires proof of the tax paid on the earlier estate. The foreign death tax credit requires evidence of the foreign payment and its link to property included in the U.S. gross estate. Portability requires a timely filed Form 706 with the election, even when no tax is owed. The state death tax deduction requires records of actual state payments. Without the paperwork, the credit or deduction is not there when the return is filed, and the double taxation the law was designed to relieve becomes double taxation that stands.