The IRS does not charge a federal inheritance tax but does charge estate taxes to the decedent's estate. Any income earned by the estate during its settlement is reported on a Form 1041 Schedule K-1---Beneficiary's Share of Income, Deductions, Credits, etc. and is taxable. Currently, eight states require beneficiaries to pay a state inheritance tax.

Inheritance Tax States

The following states that impose an inheritance tax: Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. The percentage that you pay toward inheritance taxes varies by state. For example, in Iowa if you are a lineal descendant, such as a child or grandchild, no inheritance tax is due. However, you are the sibling of the decedent, the inheritance tax rate is between 5 percent and 10 percent, depending on the net value of the estate.

IRS Estate Taxes

Estate taxes are often confused with inheritance taxes. Estate taxes are charged to the decedent's estate and not to the beneficiaries of the estate. The reason why the IRS does not charge the beneficiaries of an estate is that the estate already paid taxes on the value of the estate before distribution. However, if the estate earned money such as dividends, rent payments or interest, during the settlement phase, the estate reports these amounts on Form 1041 Schedule K-1. In this case, the beneficiaries may be subject to capital gains taxes.

Regular Capital Gains Taxes

The maximum current capital gains tax rate is currently 15 percent but is subject to change according to federal tax law. This means that any gains the estate earns during settlement are taxable up to 15 percent. For example, you are a beneficiary to an estate that owns stocks. During the settlement phase, those stocks earned a total return of $10,000. At the maximum capital gains tax rate of 15 percent, you would owe $1,500 in capital gains taxes.

Capital Gains on Collectibles and Property

The capital gains tax is currently 28 percent for collectibles and 25 percent for real property. For instance, the estate to which you are the sole beneficiary has a collection of rare coins. The trustee of the estate sells the rare coins for a profit of $50,000. This means the estate earned $50,000 of income. Since you are the sole beneficiary to the estate and are not splitting the proceeds from the sale of the coins with anyone else, you are responsible for paying the full 28 percent capital gains tax, which in this example would be $14,000.