Inheritance tax is a state tax on money or property you receive from someone who has died

Inheritance tax is a tax you owe on assets you inherit — not a tax on the estate itself before it reaches you. Only six states currently have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The federal government does not have an inheritance tax, though it does have an estate tax, which is different and applies only to very large estates.

The key difference: an inheritance tax is paid by the person who receives the money or property. An estate tax is paid by the estate before distribution. If you live in a state without inheritance tax, you owe nothing to that state on what you inherit, no matter how much it is. If you live in one of the six states that has it, you may owe tax depending on your relationship to the person who died and the value of what you received.

Inheritance tax rates and rules vary significantly by state. Some states exempt spouses and children entirely. Others tax distant relatives or non-relatives at rates ranging from 1% to 18%. The amount you owe depends on which state has the tax, who left you the money, and how much you inherited.

Key Takeaways

  • Only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes; most states do not.
  • You pay inheritance tax based on your relationship to the person who died and the value of assets you receive, not on the total estate value.
  • Spouses are almost always exempt from inheritance tax, and most states exempt children and direct descendants.
  • The executor of the estate typically handles reporting and payment, but you may need to file a separate return in the state where the tax applies.
  • Inheritance tax is separate from federal estate tax, which only affects estates worth more than $13.61 million (as of 2024).

Who pays inheritance tax and who is exempt

The person who inherits pays the tax, not the estate. However, the executor — the person managing the estate — usually handles the paperwork and payment on behalf of the heirs. The tax is calculated based on your relationship to the deceased and the value of what you inherit.

Exemptions are generous for close family. In all six states with inheritance tax, spouses are completely exempt. Children and grandchildren are exempt in most of these states, though the rules differ. For example, Pennsylvania exempts spouses, children, and grandchildren entirely. New Jersey exempts spouses, children, parents, and grandparents. Kentucky exempts spouses, children, grandchildren, parents, and grandparents. Iowa, Maryland, and Nebraska have similar close-family exemptions but with varying thresholds or rates.

Siblings, aunts, uncles, cousins, and unrelated people face higher tax rates or lower exemption amounts. In some states, a sibling might owe 12% to 15% tax on amounts over a threshold. An unrelated person might owe 15% to 18%. The exact rate depends on which state and which category of relative you fall into.

How inheritance tax is calculated in each state

Each state that has inheritance tax sets its own rates, exemptions, and thresholds. There is no single formula. Here is how the six states differ:

Iowa taxes lineal descendants (children, grandchildren, parents) at 1% to 6% on amounts over $25,000. Siblings pay 5% to 10%. More distant relatives and non-relatives pay 10% to 18%. Spouses are fully exempt.

Kentucky taxes lineal descendants at 4% to 16% on amounts over $1,000. Siblings pay 4% to 16%. More distant relatives pay 6% to 16%. Spouses, parents, and grandparents are fully exempt.

Maryland taxes lineal descendants at 0% to 10% on amounts over $1,000. Siblings and more distant relatives pay 10% to 10%. Spouses are fully exempt. The tax applies only if the total estate exceeds $5,000.

Nebraska taxes lineal descendants at 1% to 18% on amounts over $40,000. Siblings pay 13% to 18%. More distant relatives and non-relatives pay 18%. Spouses are fully exempt.

New Jersey taxes lineal descendants at 0% to 16% on amounts over $25,000. Siblings pay 11% to 16%. More distant relatives and non-relatives pay 15% to 16%. Spouses are fully exempt.

Pennsylvania taxes siblings at 12% on amounts over $3,500. More distant relatives pay 15%. Non-relatives pay 15%. Spouses, children, and grandchildren are fully exempt.

When you have to file and pay inheritance tax

The executor files an inheritance tax return with the state where the tax applies — usually the state where the deceased lived, though sometimes the state where property is located. The important date varies by state but is typically between 8 and 12 months after death. Missing the important date can result in penalties and interest.

You do not file a separate personal return for inheritance tax in most cases. The executor includes the information in the estate tax return they file with the state. However, if you receive a large inheritance and the executor does not file on your behalf, you may need to file your own return to report the income and pay any tax owed.

The executor usually pays the tax from estate funds before distributing money to heirs. This means you may receive less than the full amount you inherited because the tax comes out first. Some states allow the executor to collect the tax directly from each heir based on what they received, rather than paying it from the estate.

Inheritance tax versus estate tax: what is the difference

These two taxes are often confused because they both involve death and money, but they work very differently. Inheritance tax is paid by the person who inherits and applies in only six states. Estate tax is paid by the estate itself and applies at the federal level and in some states.

Federal estate tax applies only to estates worth more than $13.61 million (as of 2024). This threshold is high enough that most people never pay it. If your estate is smaller, there is no federal estate tax owed, and your heirs receive everything without a federal tax bill. Some states — Connecticut, Delaware, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington — also have their own state estate taxes with lower thresholds.

If you live in a state with both inheritance tax and estate tax, both could explore to your estate. However, most states have one or the other, not both. Understanding which tax applies in your state depends on where you live and how large your estate is.

How to reduce or avoid inheritance tax

If you live in one of the six states with inheritance tax, your options for reducing what you owe depend on your relationship to the deceased and the state's rules. Close family members — spouses, children, and grandchildren — are usually exempt entirely, so there is nothing to reduce.

If you are a sibling or more distant relative, you have limited options once you have inherited. The tax is based on what you received, and the rate is set by law. However, the person who left you the money could have reduced your tax burden while alive by giving you gifts during their lifetime. Federal gift tax rules allow people to give up to $18,000 per person per year (as of 2024) without triggering any tax or reporting requirement. Gifts to spouses are unlimited. These gifts do not count as inheritance and are not subject to inheritance tax.

If you are planning your own estate and want to minimize inheritance tax for your heirs, a tax professional or estate attorney in your state can advise you on strategies like trusts, lifetime gifts, or structured distributions. These decisions depend on your state's specific rules and your family situation.

Frequently Asked Questions

Do I have to pay inheritance tax if I live in a different state than the person who died?

It depends on which state has the inheritance tax. Most states tax based on where the deceased lived, not where you live. If the deceased lived in Pennsylvania and you live in California, you would owe Pennsylvania inheritance tax on what you inherited. If the deceased lived in California and you live in Pennsylvania, you would owe nothing because California has no inheritance tax.

Can I refuse an inheritance to avoid paying inheritance tax?

Yes, you can disclaim (refuse) an inheritance, and if you do, you owe no inheritance tax on it. However, the money then goes to the next person in line under the will or state law. Disclaiming must be done within a specific time frame, usually nine months after the person's death. Consult a tax professional before disclaiming because it can affect your family's overall tax situation.

Is life insurance subject to inheritance tax?

Life insurance proceeds are generally not subject to inheritance tax if they are paid directly to a named beneficiary. However, if the insurance is paid to the estate itself, it becomes part of the estate and may be subject to inheritance tax depending on your state and relationship to the deceased.

What if the executor does not file the inheritance tax return?

The state can pursue the executor and the heirs for unpaid tax, penalties, and interest. If you receive an inheritance and suspect the executor has not filed, contact the state tax department in the state where the deceased lived. You may need to file your own return to protect yourself from liability.

Does inheritance tax explore to retirement accounts like IRAs or 401(k)s?

Retirement accounts pass to named beneficiaries outside of the estate, so they are generally not subject to inheritance tax. However, the beneficiary may owe income tax on distributions from the account, depending on the account type and their relationship to the deceased. This is a separate issue from inheritance tax.