Alabama does not have an inheritance tax, and it does not have a state estate tax either. If you inherit money, real estate, a vehicle, or any other property from someone who lived in Alabama, you owe the state nothing on that transfer. The federal estate tax still exists, but it only reaches estates worth more than $15 million per person in 2026, so almost no Alabama family pays it. What can still cost you money is income tax on certain inherited assets, probate expenses, and inheritance taxes imposed by other states if the deceased lived or owned property outside Alabama.
Why Alabama Collects Nothing on Inheritances
Alabama’s estate tax was built as a “pick-up” tax. It existed only to capture a credit the federal government once allowed estates for state death taxes paid. When Congress phased that federal credit out starting in 2005, the Alabama tax lost its mechanism. A 2005 legal opinion from the Alabama Department of Revenue confirmed that no Alabama estate tax is payable for anyone dying after December 31, 2004, because the state statute in Chapter 15 of Title 40 of the Alabama Code has no independent way to impose the tax once the federal credit disappeared.1State of Alabama Department of Revenue. Legal Opinion – Alabama Estate Tax Returns Unless the Alabama legislature rewrites that statute, or Congress restores the federal credit, the tax stays at zero.
Alabama has never had a separate inheritance tax, which is a different thing: an inheritance tax is paid by the person receiving property, while an estate tax is paid by the estate itself before distribution. Neither applies here. Heirs in Alabama pay no state-level tax on what they inherit.
Two obligations do carry over with inherited property, though. If the deceased owed Alabama income taxes at death, those have to be paid from the estate before anything is distributed. And if you inherit Alabama real estate, you become responsible for property taxes in the county where the land sits going forward.
Federal Estate Tax and the $15 Million Threshold
The federal government does tax large estates. For anyone dying in 2026, the basic exclusion amount is $15 million per individual, with everything above that taxed at a top rate of 40%.2Internal Revenue Service. What’s New – Estate and Gift Tax The One Big Beautiful Bill Act, signed into law in 2025, made this higher exemption permanent and keeps it indexed for inflation.
The taxable estate counts the fair market value of everything the deceased owned at death: real estate, bank accounts, investment accounts, retirement accounts, business interests, and life insurance policies where the deceased kept ownership rights. Under 26 U.S.C. § 2042, life insurance proceeds are pulled into the gross estate if the policyholder kept any “incidents of ownership,” such as the right to change beneficiaries or borrow against the policy.3Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance Transferring a policy to an irrevocable life insurance trust at least three years before death removes it from the taxable estate.
The estate deducts debts, funeral costs, administrative expenses, and charitable bequests. The unlimited marital deduction then lets anything left to a surviving U.S.-citizen spouse pass tax-free regardless of amount. For the overwhelming majority of Alabama estates, these rules combine to produce a federal estate tax bill of zero.
Portability for Married Couples
A married couple can shelter up to $30 million in 2026 through a feature called portability. When the first spouse dies, any unused portion of their $15 million exemption can transfer to the surviving spouse. This is the deceased spousal unused exclusion, or DSUE.
Portability is not automatic. The executor has to file a federal estate tax return (Form 706) within nine months of death to elect it, even when the estate is well below the filing threshold and owes no tax. An automatic six-month extension is available on Form 4768. Families who miss the deadline still have a safety valve: Revenue Procedure 2022-32 allows a late portability election on a Form 706 filed within five years of the death, as long as the estate was not otherwise required to file.4Internal Revenue Service. Frequently Asked Questions on Estate Taxes Skipping the election is a costly mistake, because the lost exemption cannot be recovered later.
The Step-Up in Basis
The single biggest tax benefit of inheriting is the stepped-up cost basis. Under 26 U.S.C. § 1014, when you inherit an asset, your tax basis becomes the fair market value on the date of the decedent’s death rather than what the deceased originally paid.5Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent All the appreciation that happened during the deceased person’s lifetime escapes capital gains tax entirely.
Here is how that plays out. Suppose your parent bought Alabama farmland for $50,000 in 1985, and it’s worth $400,000 at death. Had your parent sold the land the day before dying, they would have owed capital gains tax on $350,000 of appreciation. Because you inherit it instead, your basis resets to $400,000. If you then sell for $405,000, you owe capital gains tax only on $5,000. The same reset applies to stocks, business interests, and most other appreciated assets.
Income Tax on What You Inherit
Alabama does not tax the act of inheriting, but it does tax income. If you inherit a rental property, you owe Alabama income tax on the rent you collect going forward. If you inherit dividend-paying stocks, the dividends are taxable. Alabama’s rates run from 2% on the first $500 of taxable income for single filers up to 5% on income above $3,000.6Alabama Department of Revenue. What Is Alabama’s Individual Income Tax Rate?
A separate category called “income in respect of a decedent” captures income the deceased earned but had not yet received. The most important example is an inherited traditional IRA or 401(k). Those accounts hold pre-tax money, so when you take distributions as the beneficiary, every dollar is taxable income on both your federal and Alabama returns. Inherited Roth IRAs generally come out tax-free, because the original contributions went in with after-tax dollars. The difference between inheriting a traditional and a Roth account can run into tens of thousands of dollars in tax over the life of the account.
If the Deceased Lived in Another State
Five states still impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. These taxes are owed to the state where the deceased lived or owned property, not the state where the heir lives. If an aunt dies as a New Jersey resident and leaves you $100,000, you may owe New Jersey inheritance tax even though you live in Birmingham and Alabama has nothing like it.
Rates and exemptions in those five states depend on your relationship to the deceased. Surviving spouses are typically exempt, children generally get favorable treatment, and more distant relatives and unrelated beneficiaries pay more, reaching as high as 16% in Kentucky and New Jersey. Alabama cannot shield you from another state’s lawful tax on a bequest from its own resident, so when a cross-state inheritance is involved, check the rules of the state where the deceased was domiciled.
Gifts During Lifetime
The federal gift tax annual exclusion for 2026 is $19,000 per recipient.2Internal Revenue Service. What’s New – Estate and Gift Tax You can give up to that amount to as many different people as you want each year without filing a gift tax return or using any of your $15 million lifetime exemption. A married couple can combine their exclusions to give $38,000 per recipient. Gifts above the annual exclusion count against the lifetime exemption but still don’t produce an out-of-pocket tax until that exemption is exhausted.
What Gets Settled Before You Receive Anything
A final Alabama income tax return must be filed for the deceased, covering January 1 through the date of death. If the estate itself generates income during administration, it also needs its own federal and Alabama income tax returns. These filings happen whether or not estate tax is owed.
When an estate crosses the $15 million filing threshold, the executor files Form 706 within nine months of death, with an automatic six-month extension available on Form 4768.4Internal Revenue Service. Frequently Asked Questions on Estate Taxes The extension buys more time to file, not more time to pay. Interest accrues on any balance left unpaid past the nine-month mark.
Executors should also know that distributing estate assets before paying the deceased’s federal tax debts can create personal liability. IRS Publication 559 states that this responsibility applies even when the tax hasn’t been formally assessed, as long as the executor knew or should have known about it.7Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators Federal debts generally come ahead of other unsecured claims in an insolvent estate, and an executor who pays other creditors first can be stuck covering the difference personally.