Alabama does not have an inheritance tax, and it does not have a state estate tax either. Beneficiaries who receive money, real estate, vehicles, or any other property from someone who died as an Alabama resident owe nothing to the state on that transfer. The federal estate tax still exists, but it only touches estates above $15 million per individual in 2026, which leaves the vast majority of Alabama families untouched at the estate level. What can still cost you: income tax on certain inherited assets, probate expenses, another state’s inheritance tax if the deceased lived elsewhere, and the tax rules that govern what you eventually do with what you receive.
Why Alabama Collects Nothing on Inheritances
Alabama’s old estate tax was a “pick-up” tax, structured only to absorb the credit the federal government once allowed for state death taxes paid. When Congress phased out that federal credit starting in 2005, the state 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 Chapter 15 of Title 40 of the Alabama Code has no independent way to impose a tax once the federal credit disappeared.1State of Alabama Department of Revenue. Legal Opinion – Alabama Estate Tax Returns Unless the legislature rewrites that statute or Congress restores the federal credit, the tax stays at zero.
Two obligations survive the deceased regardless. Any Alabama income taxes owed at death must be settled from the estate before heirs receive anything. And if you inherit Alabama real estate, you take on ongoing property taxes in the county where it sits. Those rates are among the lowest in the country, but unpaid property tax turns into a lien on the property.
When the Federal Estate Tax Applies
The federal government taxes large estates. For deaths in 2026, the basic exclusion amount is $15 million per individual, and everything above it is taxed at a top rate of 40%.2Internal Revenue Service. What’s New – Estate and Gift Tax The One Big Beautiful Bill Act, signed in 2025, made this higher exemption permanent and continues to adjust it annually for inflation.
The taxable estate covers the fair market value of everything the deceased owned at death: real estate, bank accounts, investments, retirement accounts, business interests, and life insurance policies where the deceased kept ownership rights. Under 26 U.S.C. § 2042, life insurance proceeds count in the gross estate if the policyholder retained 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.
Deductions cut the taxable amount: debts, funeral costs, administrative expenses, charitable bequests. Most estates also qualify for the unlimited marital deduction, which lets everything left to a surviving spouse who is a U.S. citizen pass tax-free.
Portability for Married Couples
Married couples can shelter up to $30 million in 2026 through 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.
It is not automatic. The executor must file Form 706 even if the estate is well below the filing threshold and owes no tax, within nine months of death, with an automatic six-month extension available on Form 4768. Families who miss that deadline still have a safety valve: Revenue Procedure 2022-32 allows a late portability election on a Form 706 filed within five years of death, as long as the estate was not otherwise required to file.4Internal Revenue Service. Frequently Asked Questions on Estate Taxes Skipping it is one of the costliest mistakes in estate planning; the lost exemption cannot be recovered later.
The Annual Gift Exclusion
The federal gift tax exclusion for 2026 is $19,000 per recipient.2Internal Revenue Service. What’s New – Estate and Gift Tax You can give that much to as many people as you want each year without filing a gift tax return or eating into your lifetime exemption. Married couples can combine to give $38,000 per recipient. Gifts above the annual exclusion reduce the $15 million lifetime exemption; gifts within it do not.
The Step-Up in Basis
One of the biggest tax breaks in inheritance law 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 death instead of what the deceased originally paid.5Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Every dollar of appreciation that built up during the deceased person’s lifetime escapes capital gains tax.
Consider Alabama farmland a parent bought for $50,000 in 1985 that’s worth $400,000 at death. If the parent had sold the day before dying, capital gains tax would apply to $350,000 of appreciation. Because you inherit it, your basis resets to $400,000. Sell it for $405,000 and you owe capital gains on $5,000. The same reset applies to stocks, real estate, business interests, and most other appreciated assets.
Income Tax on What You Inherit
Alabama doesn’t tax the act of inheriting, but it does tax income. If you inherit rental property or dividend-paying stocks, you owe Alabama income tax on what those assets earn from that point forward. 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” covers income the deceased earned but never received. The most common example is an inherited traditional IRA or 401(k). Those accounts hold pre-tax dollars, so distributions to beneficiaries are taxable both federally and in Alabama. Inherited Roth IRAs generally come out tax-free because the original contributions were made with after-tax money.
Inheriting From a State That Does Tax Inheritances
Alabama imposes nothing, but five states currently do: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Inheritance tax is paid to the state where the deceased lived or owned property, not the state where the heir lives. If your aunt dies as a New Jersey resident and leaves you $100,000, New Jersey can tax that bequest even though you live in Birmingham.
Rates and exemptions in those states turn on your relationship to the deceased. Surviving spouses are typically exempt, children usually get favorable treatment, and more distant relatives or unrelated beneficiaries face higher rates, reaching 16% in Kentucky and New Jersey. Alabama cannot shield you from another state’s claim on a bequest from its own resident.
Probate and What Reaches the Heirs
Most individually owned assets pass through probate, the court-supervised process that validates a will, settles debts, and distributes the rest. Probate is filed in the county where the deceased lived. If there’s a will, the court admits it and issues letters testamentary to the named executor.7Alabama Legislature. Alabama Code 43-2-20 – Generally With no will, the estate passes under Alabama’s intestacy laws and the court appoints an administrator.8Alabama Legislature. Alabama Code 43-8-40 – Intestate Estate Generally
Under intestacy, the surviving spouse’s share depends on who else survives. With no descendants or parents, the spouse takes everything. With children who are also the surviving spouse’s, the spouse takes the first $100,000 plus half the balance. With children from another relationship, the spouse gets half.9Alabama Legislature. Alabama Code 43-8-41 – Share of the Spouse These defaults apply only when there’s no valid will.
Once probate is open, the court publishes notice to creditors, who then have a window to file claims. Alabama Code § 43-2-350 sets the timeline, with a shorter deadline for creditors who receive direct notice than for those who learn of the estate through publication.10Alabama Legislature. Alabama Code 43-2-350 – Time and Manner of Filing Claims The executor pays valid debts in a priority order that puts funeral expenses, administrative costs, and taxes ahead of unsecured creditors before anything reaches the heirs.
Assets That Skip Probate
Not everything goes through court. Jointly owned property with a right of survivorship passes to the surviving co-owner. Bank and retirement accounts with named beneficiaries transfer directly to those beneficiaries. Life insurance proceeds paid to a named beneficiary bypass probate. Assets held in a revocable living trust also stay out, because the trust owns the property. Structuring ownership this way can eliminate probate on a family’s most valuable assets.
Small Estates
Alabama’s Small Estates Act, at Alabama Code §§ 43-2-690 through 43-2-696, offers a simplified alternative for modest estates made up of personal property. An eligible heir or beneficiary files a petition for summary distribution rather than opening a full administration. The qualifying threshold is tied to the combined value of the homestead allowance, exempt property, and family allowance under the Alabama Probate Code, adjusted for inflation. Funeral expenses and known debts must be paid or arranged for before the petition can be granted.
Executor Pay and Personal Liability
Alabama law allows personal representatives reasonable compensation, capped at 2.5% of property received and under their control plus 2.5% of disbursements. The probate court can award more for extraordinary services.11Justia Law. Alabama Code 43-2-848 – Compensation of Personal Representative A will can specify different terms, which the named executor can accept or renounce. Executor fees are taxable income to whoever collects them.
Filing fees to open probate in Alabama vary by county, generally running a few hundred dollars for the initial filing. Attorney fees, appraisals, and other administration costs come out of the estate before heirs receive their shares.
An executor who pays out estate assets before settling the deceased’s federal tax debts can be personally liable for the unpaid tax. IRS Publication 559 makes clear this personal responsibility applies even when the tax hasn’t been formally assessed, as long as the executor knew or should have known the obligation existed.12Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators Federal debts generally outrank other unsecured claims in an insolvent estate, and an executor who pays other creditors first can be on the hook for the difference.
Filing Deadlines
When an estate exceeds the $15 million filing threshold, Form 706 is due within nine months of the date of death. Form 4768 gets an automatic six-month extension to file, though not to pay.4Internal Revenue Service. Frequently Asked Questions on Estate Taxes Interest runs on any unpaid balance past the nine-month mark.
A final Alabama income tax return is also required for the deceased, covering January 1 through the date of death. If the estate itself generates income during administration, separate federal and Alabama income tax returns for the estate are required too. Those filings apply whether or not any estate tax is owed.