Tax Rates on Inheritance

When someone passes away and leaves assets to their heirs, one of the first questions that arises is: how much of that inheritance will go to taxes? The answer depends heavily on where you live, your relationship to the deceased person, and the total value of what you’re receiving.

The term 'death taxes' is often used in political and public discussions to refer broadly to taxes imposed on the transfer of assets at or after death, including estate, inheritance, and gift taxes. 'Death taxes' has historical and political connotations, frequently appearing in debates about tax policy and fairness.

Understanding tax rates on inheritance requires knowing the difference between what the federal government charges and what individual states impose. The rules vary dramatically, and getting them wrong can mean unexpected bills at an already difficult time.

This guide breaks down exactly what you need to know about inheritance and estate taxes in the United States for 2025 and beyond.

Quick Overview of Inheritance Tax Rates in the U.S.

Here’s the straightforward answer: there is no federal inheritance tax in the United States. The federal government does not tax individuals who receive property from a deceased person. However, a handful of states do impose their own inheritance taxes on beneficiaries.

As of the 2025 tax year, the U.S. tax landscape for inherited assets looks like this:

• 0 federal inheritance tax

• 12 states plus Washington D.C. with state estate taxes (including Rhode Island as one of the states with an estate tax)

• 5 states with inheritance taxes (Iowa completed its phase-out as of January 1, 2025)

The main states that currently levy an inheritance tax include:

• Kentucky

• Maryland

• Nebraska

• New Jersey

• Pennsylvania

Only six states impose an inheritance tax, while twelve states and the District of Columbia impose estate taxes.

Note that Iowa has officially repealed its inheritance tax for decedents dying on or after January 1, 2025, so estates of decedents after that date are no longer subject to Iowa’s legacy taxes.

Typical inheritance tax rate ranges across these states fall between approximately 1% and 20%, depending on two primary factors: the amount inherited and the heir’s relationship to the decedent. Lineal heirs like children and grandchildren often pay significantly lower rates—or nothing at all—while distant relatives and unrelated individuals face the highest percentages. Kentucky and New Jersey have the highest top marginal inheritance tax rates at 16%, Maryland has the lowest at a flat 10%, and Nebraska and Pennsylvania have top rates of 15%.

It’s also critical to understand that large estates may separately face the federal estate tax, which carries a top marginal rate of 40%. This tax applies to the decedent’s estate before distribution, not to the beneficiaries directly. For families dealing with substantial wealth, both estate and inheritance taxes can apply simultaneously.

What Is Inheritance Tax and How Does It Differ from Estate Tax?

Inheritance tax is a levy imposed on the person who receives assets from someone who has died. In contrast, estate tax is imposed on the total value of the decedent’s estate before anything gets distributed to heirs.

This distinction matters more than it might seem at first glance:

• Inheritance tax is calculated separately for each beneficiary, based on the net value they receive and their relationship to the decedent.

• Estate tax is calculated on the entire taxable estate, then paid out of estate assets before heirs receive anything.

The federal government only levies an estate tax—there is no federal inheritance tax whatsoever. Some states levy estate taxes, some levy inheritance taxes, and Maryland is the classic example of a state that imposes both an estate or inheritance tax depending on the circumstances.

Here’s a quick comparison of the two systems:

Practical Example: Consider two siblings inheriting equal shares from their parent in different states. The sibling in Pennsylvania (an inheritance tax state) pays taxes on their portion based on their relationship to the parent. The sibling in New York (an estate tax state with no inheritance tax) receives their share after the estate has already paid any applicable state estate taxes from the gross estate.

Understanding the Gross Estate and Its Role in Taxation

The gross estate is the starting point for determining estate tax liability and plays a central role in both federal and state estate tax calculations. The taxable value of the decedent's estate is used to determine estate tax obligations, exemptions, and planning strategies. Simply put, the gross estate represents the total value of everything a person owns or has certain interests in at the time of their death. This includes real estate, personal property such as vehicles and jewelry, financial accounts, business interests, life insurance proceeds (if the decedent owned the policy), and assets held in certain trusts.

Once the gross estate is established, allowable deductions—such as debts, funeral expenses, and charitable contributions—are subtracted to arrive at the taxable estate. The valuation of the decedent's estate is based on the fair market value of assets at the decedent's death, which also sets important deadlines for filing estate tax returns. It’s this taxable estate that is subject to the federal estate tax and, where applicable, state estate taxes. The federal estate tax exemption, also known as the unified credit, shields a significant portion of the estate from taxation. For 2025, the federal estate tax exemption is set at $13.99 million per individual, meaning only estates exceeding this amount are subject to the federal estate tax, which has a top estate tax rate of 40%.

State estate taxes can add another layer of complexity. States like New Jersey and Pennsylvania have their own estate tax laws, exemption levels, and estate tax rates, which may differ significantly from federal rules. For example, the jersey estate tax was repealed, but New Jersey still has an inheritance tax with its own exemption levels and tax rates. Understanding the total value of the gross estate and how it is treated under both federal and state estate tax laws is essential for effective estate planning and minimizing overall tax liability.

By carefully accounting for all components of the gross estate and staying informed about current exemption levels and tax rates, families can better anticipate potential estate tax obligations and take steps to reduce the taxable estate—ultimately preserving more wealth for heirs.

What Qualifies as Inherited Property?

Inherited property encompasses any assets a beneficiary receives following a decedent’s death. This can include real estate, personal property like artwork or vehicles, bank accounts, stocks, bonds, and other financial assets. The specific tax treatment of inherited property depends on state inheritance tax laws, the relationship between the beneficiary and the deceased, and the type of asset involved.

Inheritance tax, sometimes referred to as legacy taxes, may apply to these assets in certain states. Typically, lineal heirs—such as children, grandchildren, and sometimes parents—are either exempt from inheritance tax or benefit from lower tax rates. Other heirs, such as siblings, distant relatives, or unrelated individuals, may face higher tax rates or fewer exemptions. The tentative tax is calculated based on the net value or fair market value of the inherited property as of the date of death, after accounting for any applicable deductions or exemptions.

To minimize the tax burden on inherited property, beneficiaries and estate planners often consider strategies to avoid inheritance tax, such as making adjusted taxable gifts during the decedent’s lifetime or establishing trusts that remove assets from the taxable estate. The Internal Revenue Service (IRS) provides guidance on how inherited property is valued and taxed, including the application of the federal credit and the impact of adjusted taxable gifts on the overall tax liability.

Key factors in determining the tax owed on inherited property include the date of death (which sets the fair market value for tax purposes), the net value of the assets received, and the specific inheritance tax rules of the state involved. By understanding these elements and planning accordingly, beneficiaries can reduce their exposure to inheritance tax and ensure a smoother transfer of estate assets.

Current U.S. Federal Estate Tax Rates and Exemptions (2025–2026)

While there is no federal inheritance tax, the federal estate tax applies to the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. The federal estate tax can significantly shape how much beneficiaries ultimately receive from large estates. Understanding this tax is essential for anyone dealing with substantial wealth transfers.

The estate tax is imposed on the net value of the decedent's estate at the time of the decedent's death, after any exclusions or credits. For deaths occurring in 2025, the federal estate tax exemption stands at approximately $13.99 million per person (this figure is adjusted annually for inflation by the Internal Revenue Service). In 2024, the federal estate tax exemption is $13.61 million per person. The estate tax rate starts at 18% for amounts just above the exemption and climbs to a top marginal rate of 40% for the largest taxable estates.

Here’s the critical development: under current law, this higher exemption was created by the Tax Cuts and Jobs Act of 2017, which temporarily raised the exemption from $5.49 million to $11.18 million per person. In 2018, the federal estate tax exemption doubled to $11.18 million per taxpayer due to the Tax Cuts and Jobs Act of 2017. This provision is scheduled to sunset after December 31, 2025. Beginning in 2026, the applicable exclusion amount will drop roughly in half—back to something in the range of $6-7 million per person, adjusted for inflation.

The federal estate tax uses progressive brackets, meaning the tax rate increases as the taxable estate grows larger. The calculation starts with the gross value of the decedent's estate at the decedent's death, subtracts allowable deductions (including funeral expenses, debts, and charitable bequests), then applies the graduated rates to determine the tentative tax.

Several key federal concepts affect the final tax liability:

• Unified gift and estate tax system: The gift tax exemption and estate tax exemption are combined. Lifetime taxable gifts reduce the amount of estate tax exemption available at death. The Internal Revenue Code treats adjusted taxable gifts as part of the overall calculation.

• Portability election: A surviving spouse can use any unused portion of their deceased spouse’s exemption if the estate files a timely estate tax return (Form 706). This effectively allows married couples to shield up to roughly $28 million combined.

• Unlimited marital deduction: Property passing to a U.S.-citizen surviving spouse is entirely exempt from federal estate tax, regardless of amount.

Because of the high exemption levels, only around 0.2% of estates actually owe any federal estate tax. The vast majority of American families will never pay federal taxes on inherited property. However, for those with estates approaching these thresholds—especially after the 2025 sunset—proactive planning becomes essential.

States With Inheritance Taxes and Their Typical Rate Ranges

State inheritance taxes apply in addition to any federal estate tax and are based on state laws where the decedent was domiciled or where certain taxable property is located. These state-level taxes can create significant tax burden for beneficiaries who don’t qualify for exemptions. Many states calculate inheritance taxes based on the closeness of the relationship between the beneficiary and the deceased individual.

Here’s a breakdown of each state currently imposing an inheritance tax:

Kentucky

• Progressive rates ranging from approximately 4% to 16%

• Close family members (surviving spouse, children, parents, grandchildren) are generally exempt

• More distant relatives and unrelated beneficiaries face the highest rates

• The Kentucky Department of Revenue administers the tax

Maryland

• Inheritance tax rate of approximately 10% on certain transfers

• Maryland levies both inheritance and estate taxes (the only state with both)

• Spouses, children, parents, grandparents, and siblings are typically exempt

• Other heirs pay the flat 10% rate on amounts received

Nebraska

• County-administered inheritance tax with varying rules

• Tiered structure: approximately 1% for close relatives (children, parents)

• Higher rates up to around 15-18% for distant heirs and unrelated beneficiaries

• Each county may have slightly different administration procedures

New Jersey

• New Jersey estate tax was repealed in 2018, but the New Jersey inheritance tax remains

• Beneficiaries are divided into classes:

• Class A (spouses, children, parents, grandparents): exempt

• Class C (siblings, son/daughter-in-law): taxed at approximately 11-16%

• Class D (everyone else): taxed at approximately 15-16%

• New Jersey and Pennsylvania are neighboring states with different approaches to these taxes

Pennsylvania

• Flat or tiered rates based on relationship:

• Spouses: 0%

• Direct descendants and lineal heirs: 4.5%

• Siblings: 12%

• Other heirs: 15%

• Pennsylvania’s system is straightforward but can result in substantial bills for non-family beneficiaries

Iowa (Historical Note)

• Iowa has fully repealed its inheritance tax for decedents dying on or after January 1, 2025

• The phase-out was gradual, with rates reduced incrementally starting in 2021

• Estates from deaths before this date may still be subject to the old rules

Key patterns across inheritance tax states:

• Rates are typically progressive—higher inheritances face higher marginal rates

• Exemptions and special treatment commonly apply to spouses, minor children, and charitable organizations. In most states, spouses are exempt from the inheritance tax when they inherit property from another spouse.

• State exemption levels and thresholds can change through legislation, so staying current is important

• Unlike federal estate taxes, state inheritance taxes often apply at much lower threshold amounts

Inheritance taxes are paid by the recipient of a bequest based on the value of the assets received.

If someone dies without a will, the rules of intestate succession determine who inherits the estate, and these rules may affect who is subject to inheritance tax.

How Inheritance Tax Rates Are Calculated in Practice

Understanding how inheritance taxes work in practice helps beneficiaries anticipate their obligations. The general calculation flow involves determining what each beneficiary receives, applying state-specific exemptions, then applying the correct rate based on relationship and amount.

Here are the typical steps for calculating state inheritance tax:

1. Identify the applicable state law: Usually, this is the state where the decedent was domiciled at the date of death. For real estate or personal property located in other states, those states’ rules may also apply.

2. Classify each beneficiary: States categorize heirs into statutory classes. New Jersey uses Class A, B, C, and D. Pennsylvania distinguishes between spouses, lineal heirs, siblings, and others.

3. Determine the taxable amount: Calculate each beneficiary’s share after exemptions and deductions. Some states provide small threshold exemptions or exclude specific assets like life insurance proceeds.

4. Apply the state’s tax table: Use the inheritance tax brackets to find the correct percentage for that beneficiary’s taxable share.

Many states use tiered brackets or sliding scales. The effective tax rate for a beneficiary may be lower than their highest marginal bracket because lower portions of the inheritance are taxed at lower rates.

Worked Example: Pennsylvania Inheritance Tax

Consider a parent who leaves a $200,000 inheritance to different types of beneficiaries in Pennsylvania:

Scenario A: Inheritance to an adult child (lineal heir)

• Applicable rate: 4.5%

• Tax calculation: $200,000 × 0.045 = $9,000

• Net inheritance: $191,000

Scenario B: Inheritance to an unrelated friend

• Applicable rate: 15%

• Tax calculation: $200,000 × 0.15 = $30,000

• Net inheritance: $170,000

The difference is stark: the same inheritance generates $21,000 more in tax when it passes to someone outside the family. This is why understanding your state’s relationship-based rate structure matters.

Filing Requirements and Timing

Beneficiaries and the personal representative of the estate typically must file a state inheritance tax return within a set deadline—commonly 6 to 9 months from the date of the decedent's death. Some states offer discounts for early payment (Pennsylvania provides a 5% discount for payment within 90 days) or impose penalties and interest for late filing.

The estate tax return for federal purposes (Form 706) is due 9 months after the decedent's death, though extensions may be available. State estate taxes often follow similar timelines.

Interaction With Income Tax and Capital Gains on Inherited Assets

Inheritance tax is entirely separate from income tax, and most inheritances are not treated as taxable income for federal income tax purposes. This distinction confuses many people who expect to pay taxes on cash they receive from an estate.

Here’s what you need to know:

• Cash inheritances are generally not subject to federal income tax. However, any interest or investment income earned on that cash after you receive it is taxable in the normal way.

• Inherited investments (stocks, mutual funds, real estate) typically receive a “step-up” in cost basis to the fair market value on the date of death. This significantly reduces capital gains tax when the heir eventually sells.

The step-up in basis is one of the most valuable tax benefits in estate planning. It works like this:

Capital Gains Example

Your grandmother purchased stock decades ago for $20,000. At her death, that stock is worth $100,000 (fair market value). You inherit the stock.

• Your cost basis: $100,000 (stepped up from $20,000)

• You sell six months later for $120,000

• Your taxable capital gain: $120,000 - $100,000 = $20,000

Without the step-up, your capital gain would have been $100,000 ($120,000 - $20,000 original basis). The step-up saves you taxes on $80,000 of appreciation that occurred during your grandmother’s lifetime.

If you sold immediately at the date-of-death value of $100,000, you would owe zero capital gains tax.

Important Exceptions

• Retirement accounts (traditional IRAs, 401(k)s) do not receive a full income tax exclusion. Distributions from inherited retirement accounts are generally taxable income to the beneficiary. This is not an inheritance tax—it’s regular income tax that would have applied whenever the money was withdrawn.

• Income in respect of a decedent (IRD): Certain income items that the decedent earned but hadn’t yet received (like unpaid wages or deferred compensation) remain taxable to whoever receives them.

• State rules: Some states may treat certain inherited income differently than federal rules.

The bottom line: you generally won’t owe income tax on your inheritance itself, but you may owe inheritance tax (if your state has one), and you will owe income tax on any earnings generated after you receive the assets.

Avoiding Taxes: Legal Strategies to Minimize Inheritance and Estate Tax

Minimizing the tax burden on inherited assets is a top priority for many families and individuals engaged in estate planning. With the right estate planning strategy, it’s possible to significantly reduce or even eliminate estate and inheritance taxes—ensuring more of your legacy passes to your chosen heirs rather than to the government.

Here are some of the most effective, fully legal strategies to help avoid or minimize estate tax and state estate taxes:

Planning Strategies to Reduce or Manage Inheritance Tax Rates

Careful estate planning can significantly reduce or eliminate inheritance and estate tax exposure for many families. Whether you’re expecting to leave assets or receive property, understanding these strategies empowers better decision-making.

Here are the most common approaches to minimize estate and inheritance taxes:

Lifetime Gifting

• The 2025 annual federal gift tax exclusion allows gifts of approximately $19,000 per recipient without using any of your lifetime exemption

• You can give this amount to unlimited recipients each tax year

• Gifts beyond the annual exclusion use your unified credit (the roughly $13.99 million lifetime exemption)

• Strategic gifting reduces the total value of your taxable estate at death

• Combining lifetime gifting with trusts can maximize tax benefits and protect assets from inheritance taxes

Irrevocable Trusts

• Assets transferred to irrevocable trusts are generally removed from your estate for estate tax purposes

• Creating an irrevocable trust can help reduce estate taxes by transferring assets out of the taxable estate

• Trusts can control timing and conditions of distributions to heirs

• Common structures include irrevocable life insurance trusts (ILITs), grantor retained annuity trusts (GRATs), and spousal lifetime access trusts (SLATs)

• Trust income may be subject to higher compressed tax brackets under federal taxes

Maximizing Relationship-Based Exemptions

• In inheritance tax states, leaving assets to exempt beneficiaries (spouses, direct descendants) eliminates or reduces state inheritance tax

• Restructuring bequests to favor lineal heirs over distant relatives or friends can produce significant tax savings

• Charitable bequests reduce both the taxable estate and potential inheritance tax exposure

Charitable Giving

• Naming charities as beneficiaries removes those amounts from both estate and inheritance tax calculations

• Charitable remainder trusts provide income during your lifetime with the remainder going to charity

• Donor-advised funds offer flexibility in timing charitable distributions

Coordinating Federal and State Rules

• The 2025 TCJA sunset makes 2024-2025 a critical window for large gift transfers

• Families with estates exceeding expected 2026 exemption levels should consider accelerated gifting

• State estate and state inheritance tax rules must be analyzed alongside federal planning

Liquidity Planning

• Life insurance can provide liquid funds to pay inheritance or estate taxes without forcing heirs to sell businesses, real estate, or other illiquid assets

• Proper ownership structure (often through an ILIT) keeps insurance proceeds outside the estate

Domicile Planning

• Moving from a state with high estate or inheritance taxes to a state without these taxes can materially change overall tax outcomes

• States without estate or inheritance tax include Florida, Texas, Nevada, and many others

• Domicile changes require genuine relocation, not just paper changes

Inheritance taxes are highly burdensome and can drive high-net-worth individuals out of state. Some argue that reducing or eliminating these taxes could promote economic growth by encouraging investment, business continuity, and entrepreneurial activity.

Review beneficiary designations regularly—retirement accounts, life insurance, and transfer-on-death accounts pass outside probate and according to their own beneficiary forms, not your will.

When Professional Advice Is Essential

Professional guidance from a tax professional or estate planning attorney is particularly important in these situations:

• High-value estates: When the projected estate value approaches or exceeds federal exemption levels, especially with the 2025 sunset looming

• Multi-state complexity: When assets are spread across multiple states with different inheritance or estate tax laws (for example, owning real estate in New Jersey and Pennsylvania creates exposure to both states’ rules)

• Complex family structures: Blended families, closely held businesses, or situations involving non-U.S. citizen spouses require specialized planning

A qualified professional can model different scenarios, recommend appropriate trust structures, and time gifts or transfers to minimize combined federal and state tax burden. Estate tax laws change frequently, and what worked five years ago may no longer be optimal.

Before meeting with an advisor, prepare by gathering:

• Approximate net worth figures across all assets

• A list of assets organized by state location

• Current beneficiary designations for retirement accounts and insurance

• Intended distribution plan among heirs

This preparation makes planning discussions more efficient and helps advisors provide tailored recommendations rather than generic advice.

Key Takeaways

• The federal government does not impose an inheritance tax; only five states currently tax beneficiaries directly

• Federal estate tax applies to estates exceeding approximately $13.99 million (2025), with a top rate of 40%

• The federal estate tax exemption will drop significantly in 2026 unless Congress acts

• State inheritance tax rates typically range from 1% to 20%, with rates varying by relationship to the decedent

• Most inheritances avoid federal taxes entirely due to high exemption levels and the step-up in basis for inherited property

• Proactive estate planning strategy—including lifetime gifting, trusts, and domicile considerations—can substantially reduce or avoid taxes for heirs

Whether you’re anticipating an inheritance or planning your own estate, understanding these rules allows you to avoid inheritance tax exposure where possible and plan effectively for any obligations that do arise. The interaction between federal estate taxes, state estate taxes, and state inheritance taxes creates a complex landscape, but the fundamentals are manageable once you understand how inheritance taxes work.

Given the significant changes coming in 2026, now is an ideal time to review your situation with a qualified advisor and ensure your plans account for both current rules and upcoming shifts in tax law.