Several states charge the beneficiary an inheritance tax on the value of the inherited property. The inheritance tax is different from the estate tax. The estate tax is levied on the decedent’s estate and is paid before the assets in the estate are distributed. The inheritance is levied on the beneficiary who receives assets from the estate.
While state income taxes or sales taxes can be claimed as a deduction on your federal tax return if you itemize deductions, according to the IRS, state inheritance taxes are specifically excluded and cannot be claimed as a deduction.
The states that impose an inheritance tax (as of 2012) are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee.
But, according to the IRS, if you receive income in respect of a decedent that you as the beneficiary have to include in your federal taxable income, you can claim a miscellaneous itemized deduction for the amount of federal estate tax attributable to that income. This is a miscellaneous itemized deduction that is not subject to the 2% of adjusted gross income limit; that is, it is completely deductible if you itemize deductions. This deduction is reported under “Other Miscellaneous Deductions” on Schedule A, Itemized Deductions.
The amount of the deduction you can claim is based on the income that is taxed twice. For example, the decedent may have been entitled to receive income at the time of death. If the decedent had a business, there may have been accounts receivable pending collection. That income is included in the estate tax return as income in respect of a decedent, and is subject to the estate tax. If you receive that income as a beneficiary, you are also subject to income tax.
The deduction you can claim is the proportion of the federal estate tax that corresponds to the income in respect of a decedent that you receive as a beneficiary. A calculation is made of the total amount of the estate tax that qualifies for the deduction, which is the estate tax on income in respect of the decedent, and your proportional share of that estate tax. The income you receive would be divided by the total income in respect of the decedent and that fraction would be multiplied by the estate tax eligible for the deduction.
If you as a beneficiary do not have this information yourself, the estate executor or administrator should be able to help you based on the estate tax return filed.
Publication 17, Your Federal Income Tax, IRS
Publication 559, Survivor, Executors, and Administrators, IRS
Schedule A, Itemized Deductions