There is no Colorado inheritance tax, and there is no Colorado estate tax either. If you inherit cash, a house, investments, or personal property from a Colorado estate, the state takes nothing from you simply because you inherited it. Federal rules are where the tax questions actually live, and for most people those questions come down to two things: whether the estate is large enough to trigger federal estate tax, and whether you inherited a retirement account.
No State Tax on Inheritances in Colorado
Colorado does not impose an inheritance tax on beneficiaries. It also does not collect a separate state estate tax. A Colorado estate tax statute technically remains on the books at Title 39, Article 23.5 of the Colorado Revised Statutes, but the tax it imposes is tied to the federal state death tax credit, and Congress phased that credit down to zero between 2002 and 2005. The practical effect has been a $0 Colorado estate tax since 2005.
Only five states currently impose an inheritance tax at all: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates in those states run from roughly 1% to 16% depending on how closely the beneficiary was related to the person who died. None of that applies to inheritances from a Colorado estate. If the person you inherited from lived in one of those five states, though, keep reading — the section on out-of-state estates below explains why their rules can still reach you.
When Federal Estate Tax Applies
The federal estate tax is paid by the estate itself, not by individual beneficiaries, and it only applies to large estates. For deaths in 2026, the basic exclusion amount is $15 million per person, a figure set by the One, Big, Beautiful Bill Act signed into law on July 4, 2025.1Internal Revenue Service. What’s New — Estate and Gift Tax A married couple who properly elects portability can effectively shield up to $30 million. Anything above the exclusion is taxed on a graduated scale that starts at 18% and reaches 40%.2Internal Revenue Service. Estate Tax
When an estate does owe federal tax, the executor files IRS Form 706 within nine months of the date of death and pays the tax at the same deadline. An automatic six-month filing extension is available through Form 4768, but the tax payment itself is still due at the nine-month mark.3Internal Revenue Service. Instructions for Form 706 Where a closely held business makes up more than 35% of the gross estate, Section 6166 of the Internal Revenue Code allows installment payments that can stretch as long as 15 years.4Office of the Law Revision Counsel. 26 USC 6166
Late filing and late payment penalties both accrue at their own rates and both cap at 25% of the unpaid tax, with interest compounding on top.5Office of the Law Revision Counsel. 26 USC 6651
One filing point matters even when no tax is owed. If a surviving spouse wants to preserve the deceased spouse’s unused federal exclusion for later use (portability), the estate has to file Form 706 to make the election. Skipping the filing forfeits that unused exclusion permanently.6Internal Revenue Service. Frequently Asked Questions on Estate Taxes
Stepped-Up Basis on Inherited Property
The single most valuable federal rule for beneficiaries is the stepped-up basis. Under 26 USC 1014, inherited assets take a new tax basis equal to their fair market value on the date of the decedent’s death, regardless of what the original owner paid.7Office of the Law Revision Counsel. 26 USC 1014 If a parent bought a home for $150,000 and it was worth $500,000 when they died, your basis is $500,000. Sell it a month later for $505,000 and you owe capital gains tax on $5,000, not on $355,000.
The step-up applies to stocks, real estate, and most other appreciated property. If the estate files Form 706, the executor may elect to use an alternate valuation date six months after death, which can help if values have dropped during that window.8Internal Revenue Service. Basis of Assets
One exception is worth flagging. If you gave appreciated property to the decedent within one year before death and then inherited it back, the step-up does not apply. You keep the decedent’s adjusted basis, which was your original basis.
For estates that must file Form 706, beneficiaries receive a Schedule A from Form 8971 listing the estate tax value of what they inherited. When you eventually sell, the basis you report has to be consistent with that value. Overstating basis to reduce capital gains can trigger an accuracy-related penalty.9Internal Revenue Service. Gifts and Inheritances
Inherited Retirement Accounts
Retirement accounts are where most Colorado beneficiaries actually owe tax. Traditional IRAs and 401(k)s were funded with pre-tax dollars, so withdrawals are taxed as ordinary income at both the federal and Colorado level. Roth IRAs are the exception: qualified distributions stay tax-free because the contributions were made with after-tax money.
For account owners who died in 2020 or later, the withdrawal rules depend on whether the beneficiary qualifies as an “eligible designated beneficiary.” That category includes a surviving spouse, a minor child of the account holder, a disabled or chronically ill person, and someone no more than ten years younger than the deceased. Eligible designated beneficiaries can stretch distributions across their own life expectancy.10Internal Revenue Service. Retirement Topics – Beneficiary
Everyone else, which includes most adult children, has to empty the entire account by the end of the tenth year after the account holder’s death. The IRS has signaled through proposed regulations that when the original owner had already begun taking required minimum distributions, beneficiaries subject to the ten-year rule must also take annual distributions during those years rather than waiting to take one lump sum at the end. Final regulations were anticipated to apply for calendar years beginning on or after January 1, 2025. A beneficiary who skips a required annual distribution can face a 25% excise tax on the amount that should have come out.
The cumulative tax bill on a large inherited traditional IRA can be significant. A $500,000 balance spread evenly across ten years adds roughly $50,000 to taxable income each year. Beneficiaries who have flexibility often pull larger amounts in lower-income years and smaller amounts in higher-income years to manage their overall bracket.
Inheriting From an Out-of-State Estate
Colorado’s lack of an inheritance tax protects you when the estate is administered in Colorado. It does not protect you when the person you inherited from lived somewhere else. Inheritance tax follows the decedent’s state of residence, not the beneficiary’s. A Colorado resident who inherits from a Pennsylvania estate, for example, can owe Pennsylvania inheritance tax at rates that reach 15% depending on the family relationship.
If the deceased owned real property in more than one state, each state where property is located may require its own ancillary probate proceeding, with its own timelines and fees. Beneficiaries dealing with multi-state estates often need legal counsel in each jurisdiction involved.
The Final Income Tax Return and Estate Income
Someone still needs to file the deceased person’s final federal income tax return. That job usually falls to the surviving spouse or the estate’s personal representative. The return covers income earned from January 1 through the date of death, uses a standard Form 1040, and is due on the same April 15 deadline that would have applied if the person had lived.11Internal Revenue Service. Filing a Final Federal Tax Return for Someone Who Has Died The word “deceased” along with the person’s name and date of death should appear across the top of a paper return.
The personal representative may also need to file Form 56 to notify the IRS of the fiduciary relationship. If a refund is due and the representative was not court-appointed, Form 1310 goes in to claim it.12Internal Revenue Service. Topic No. 356, Decedents
A separate filing catches people off guard. If the estate itself earns income after the date of death, from interest, rent, dividends, or asset sales, the personal representative must file Form 1041, the fiduciary income tax return, for any tax year in which the estate has $600 or more in gross income.13Internal Revenue Service. 2025 Instructions for Form 1041 An estate that holds a rental property or brokerage account for several months during probate is generating taxable income that has to be reported.
Deductions That Reduce a Taxable Estate
For the rare estate that does approach the $15 million federal threshold, several deductions bring the taxable amount down. The unlimited marital deduction lets a deceased spouse pass any amount of property to a surviving spouse who is a U.S. citizen with no estate tax at all.14Office of the Law Revision Counsel. 26 USC 2056 Where the surviving spouse is not a citizen, the deduction is only available if the assets pass into a qualified domestic trust. Funeral expenses, outstanding debts, mortgages, administration costs, and charitable bequests also reduce the value subject to tax.2Internal Revenue Service. Estate Tax
The current federal exclusion is historically high, and future legislation could lower it. Families with assets in that range generally benefit from working with an estate planning attorney while the account owner is alive, because portability elections, gifting, and trust structures all require action before death.