What inheritance tax is and who pays it

Inheritance tax is a tax on money and property you receive from someone who has died. It is not the same as estate tax. The key difference: estate tax is paid by the person who died (or their estate), while inheritance tax is paid by the person who receives the money or property.

Only six states currently have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rate and what you inherit before you owe tax varies by state and by your relationship to the person who died. Spouses are almost always exempt. Children, parents, and siblings have different thresholds depending on the state. Unrelated people pay the highest rates.

If you live in a state without an inheritance tax, you will not owe this tax no matter what you inherit. If you live in one of the six states that has it, the person who died may have lived in a different state — the tax is based on where you live, not where they lived.

Key Takeaways

  • Inheritance tax applies only in six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, and is based on where you live, not where the person who died lived.
  • Spouses are exempt from inheritance tax in all six states; children and parents have lower tax rates than unrelated beneficiaries.
  • The simplest way to reduce inheritance tax is to understand your state's exemption threshold — money below that amount is not taxed.
  • The person who died can reduce what you owe by making gifts during their lifetime, which may be tax-free up to a federal limit.
  • Trusts, life insurance, and retirement accounts can be structured to pass to beneficiaries outside of inheritance tax in some cases, but the rules are complex and state-specific.

Check your state's exemption threshold first

Each of the six inheritance tax states sets a dollar amount below which no tax is owed. This is called the exemption or threshold. If you inherit less than that amount, you owe nothing. The thresholds vary widely and change periodically.

As of 2024, exemptions range from roughly $40,000 in some states to $500,000 or higher in others. New Jersey and Pennsylvania have different rates depending on your relationship to the person who died — a child pays a lower rate than a cousin. Iowa and Kentucky exempt close relatives entirely but tax unrelated beneficiaries.

Before you plan anything, contact your state's tax department or a tax professional in your state to confirm the current exemption and rate that applies to you. The exemption amount can change, and the relationship that matters is the one between you and the person who died, not their total estate size.

Lifetime gifts from the person who died

One of the most direct ways to reduce inheritance tax is for the person who died to give money or property away before they die. These gifts are often not subject to inheritance tax, and they reduce the total amount that passes to you at death.

Federal tax law allows a person to give up to a certain amount per year to any person without triggering federal gift tax. That limit is $18,000 per person per year in 2024 (it changes annually). A married couple can give $36,000 per year to the same person. These gifts are not taxed at the federal level, and most states do not tax gifts either.

The person who died can also give larger amounts during their lifetime without owing tax, as long as they file the proper federal forms and stay within their lifetime exemption. This is a complex area, and the rules depend on federal law, not state inheritance tax law. A tax professional or estate attorney can advise whether this strategy makes sense in a specific situation.

Retirement accounts and life insurance beneficiaries

Money in retirement accounts (like IRAs and 401(k)s) and life insurance proceeds pass directly to the named beneficiary, bypassing the person's will and estate. In some states, these assets may not be subject to inheritance tax, or they may be taxed differently than other inherited property.

The rules vary by state. Some states exempt life insurance proceeds entirely. Others tax them as part of the inheritance. Retirement accounts are treated differently still — some states exempt them, others do not. The only way to know what applies to you is to check your specific state's rules or speak with a tax professional.

If you are the person who died and you want to reduce inheritance tax for your beneficiaries, naming them correctly on these accounts is one of the most important steps you can take. A beneficiary designation on a retirement account or life insurance policy overrides your will, so it must be reviewed and updated regularly.

Trusts and how they may reduce inheritance tax

A trust is a legal arrangement where one person (the trustee) holds money or property for the benefit of another person (the beneficiary). Trusts can be set up during someone's lifetime or created in their will to take effect after death.

Some types of trusts may reduce or avoid inheritance tax, depending on your state. For example, a trust that is irrevocable (cannot be changed) and is set up properly may keep assets out of the taxable estate. Other trusts, like a revocable living trust, do not reduce inheritance tax but may offer other benefits like avoiding probate.

Trust rules are complex and state-specific. A trust that works in one state may not work the same way in another. If you are considering a trust to reduce inheritance tax, you need information from an estate attorney licensed in your state, not general information. The cost of setting up a trust is usually $1,000 to $3,000, but it can be much higher for complex estates.

Marital deductions and spousal transfers

Spouses are exempt from inheritance tax in all six states that have it. This means if you inherit from your spouse, you owe no inheritance tax, no matter how much you inherit. This exemption is automatic — you do not need to do anything special to claim it.

Because of this exemption, many married couples do not need to plan for inheritance tax at all. However, if a couple has a very large estate and both spouses will eventually die, the surviving spouse's estate may owe tax when they pass assets to their children or other heirs. In that case, planning during the first spouse's lifetime can reduce what the second spouse's estate owes.

This kind of planning usually involves a trust or a specific will structure. Again, this requires information from an estate attorney, not general information.

What you need to do if you inherit and owe tax

If you inherit money or property in one of the six inheritance tax states and you owe tax, you must file an inheritance tax return with that state. The important date is usually nine months after the person died, though it varies by state. The person's estate or executor usually handles this, but you may need to provide information about what you inherited.

You pay the tax from the money or property you inherited, not from your own pocket (unless you choose to). If you do not pay on time, the state will charge interest and penalties. If you believe you should not owe tax because you fall under an exemption, you still file the return and claim the exemption on it.

If you are unsure whether you owe tax or how much, contact the tax department in the state where you live. They can tell you the current rate and exemption that explore to your situation. You can also work with a tax professional or attorney to file the return correctly.

Frequently Asked Questions

Is inheritance tax the same as estate tax?

No. Estate tax is paid by the person's estate before money is distributed to heirs. Inheritance tax is paid by the person who receives the money. Only six states have inheritance tax. Federal estate tax applies only to very large estates (over $13.61 million in 2024), so most people do not owe it.

Do I owe inheritance tax if the person who died lived in a different state?

Inheritance tax is based on where you live, not where the person who died lived. If you live in a state without inheritance tax, you owe nothing. If you live in one of the six states that has it, you may owe tax even if the person who died lived elsewhere.

Can I avoid inheritance tax by moving to a different state?

The tax is based on where you live when you inherit, not where you lived before. If you move to a state without inheritance tax after someone dies but before you receive the inheritance, the rules may be different — this depends on the state and the timing. Consult a tax professional before moving for this reason.

What if I inherit property instead of money?

Property (real estate, vehicles, valuables) is subject to inheritance tax just like money. The tax is based on the fair market value of the property at the time of death. You may owe tax even if you do not sell the property.

Do I have to pay inheritance tax if I am the spouse?

No. Spouses are exempt from inheritance tax in all six states that have it. You can inherit any amount from your spouse and owe no inheritance tax.