Recent breakthroughs in induced pluripotent stem cell (iPSC) technology hold promise for novel cell-based therapies as well as for effective drug development. The therapeutic potential of iPSCs makes it important to understand the reprogramming mechanisms and iPSC differentiation process. Epigenetic states that mediate exogenous stimulations on cell-intrinsic transcriptional features play a key role in iPSCs. This review focuses on epigenetic mechanisms that control iPSC pluripotency and differentiation. We discuss the potential application of epigenetic modulations in development of iPSC-based therapies and disease models.