What Is Inheritance Tax?

If you’ve recently lost a loved one or expect to receive assets from someone’s estate, understanding inheritance tax is essential. This state-level tax can catch beneficiaries off guard if they don’t know the rules. Let’s break down exactly how inheritance tax works, who pays it, and what you need to know in 2025.

Quick answer: what is inheritance tax and who actually pays it?

Inheritance tax is a state-level tax paid by beneficiaries—not the estate—on assets they receive after someone dies. The key distinction here is that the beneficiary who inherits the money or property is responsible for paying the tax, meaning they may need to pay taxes on what they receive, not the estate itself before distribution.

There is no federal inheritance tax in the United States as of 2025. The federal government does not impose this type of tax at all. Only certain states levy an inheritance tax on assets inherited by heirs.

As of 2025, only six states charge an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In 2026, only five states will impose inheritance tax due to Iowa's repeal for deaths occurring on or after January 1, 2025.

Here’s the good news for many families: close relatives are often fully or largely exempt from inheritance tax. A surviving spouse typically owes nothing, and direct descendants like children often pay little to no tax depending on the state. This means most people who inherit money never actually pay this tax.

Consider a concrete example. If your aunt in New Jersey leaves you $200,000 in 2025, you—as the beneficiary—could potentially owe New Jersey inheritance tax on a portion of that amount, depending on the recipient's relationship to her. Nieces and nephews are not fully exempt in New Jersey, so you’d need to understand the specific exemption amounts and tax rates that apply to your situation.

Inheritance tax basics: definition & how it works

Inheritance tax is a tax some states charge individuals who receive money, property, or other assets after someone’s death. Unlike a sales tax or income tax you might be familiar with, this tax is triggered specifically by the transfer of wealth from a deceased person to their heirs.

The tax is determined separately for each beneficiary based on what that specific person receives. If three siblings each inherit different amounts from their parent’s estate, each sibling’s inheritance tax liability (if any) is calculated individually. The value of assets you personally receive—whether cash, real estate, investments, or business interests—determines your potential tax obligation.

One important rule to understand: inheritance tax applies based on where the deceased person lived or owned property, not where you as the heir reside. For example, if you live in California (which has no inheritance tax) but inherit from a Pennsylvania resident, you may still owe Pennsylvania inheritance tax on those inherited assets. The decedent’s state of residence and property locations drive which rules apply.

Charitable organizations are generally exempt from inheritance tax in all states that charge it. If the deceased individual left assets to a qualified charity, that portion of the estate typically passes free of inheritance tax.

Typical assets that can be subject to inheritance tax include bank accounts, brokerage and investment accounts, real estate such as homes or farms, closely held business interests, and personal property like vehicles or jewelry.

How inheritance tax differs from estate tax

Both inheritance tax and estate tax are sometimes called “death taxes,” but they work very differently. Understanding the distinction matters because the same estate could potentially face both types of taxation depending on the circumstances.

Who pays is the fundamental difference. An estate tax is paid out of the decedent’s estate before heirs receive anything—it reduces the total pool of assets available for distribution. State estate taxes are typically calculated based on the net value of the decedent’s estate, meaning the total value after deductions and liabilities. Inheritance tax, by contrast, is paid by each beneficiary on what they personally inherit after the estate has been distributed.

Federal law imposes only an estate tax, not an inheritance tax. The federal estate tax applies in 2025 only if the taxable estate exceeds the federal exemption of approximately $13.99 million per person. This means most estates never owe federal estate tax. It’s worth noting that this exemption amount is scheduled to drop roughly by half in 2026 under current law, though legislative changes could alter this. These figures are for illustration and subject to change.

At the state level, many states have their own state estate taxes with lower thresholds than the federal exemption, while only five states still have inheritance tax as of 2025. Maryland is notable as the only state that imposes both a state estate tax and an inheritance tax.

What’s taxed also differs. Consider this example: In Maryland, a $5 million estate might first pay Maryland estate tax (and possibly federal estate tax if combined with other assets) at the estate level. Then, certain heirs who receive distributions could also face Maryland inheritance tax on what they personally receive. The same dollars can potentially be subject to both types of taxation in some scenarios.

Which U.S. states have inheritance tax (as of 2025)?

As of early 2025, five states levy an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa’s inheritance tax was repealed for deaths occurring on or after January 1, 2025, so if you inherit from someone who died in Iowa after that date, you will not owe Iowa inheritance tax.

State tax laws change over time, so readers should always confirm current rules with each state’s revenue department or consult a tax professional before making decisions based on this information.

The five inheritance-tax states impose rates that vary widely, generally ranging from about 1% to 16% depending on the state, the inheritance value, and the recipient’s relationship to the deceased person. Not all states use the same rate structures—some have flat rates for certain beneficiary classes while others use graduated scales where rates increase as inheritance values grow.

Maryland stands out as the only state that currently imposes both a state estate tax and an inheritance tax. This means Maryland estates above certain thresholds may face estate tax at the estate level, and then individual beneficiaries may also owe inheritance tax on distributions they receive.

Even in these five states, most states exempt surviving spouses entirely from inheritance tax. Children, grandchildren, and other lineal heirs often receive full exemptions or face only minimal tax rates. Distant relatives and non-related beneficiaries are more likely to pay inheritance tax and typically face higher rates and lower exemption amounts.

How inheritance tax is calculated

Inheritance tax is calculated separately for each heir based on three primary factors: the state’s tax law, the heir’s relationship to the deceased, and the value and type of assets they receive. This individualized approach means two beneficiaries of the same estate can face very different tax obligations.

Each state divides heirs into relationship “classes” with different exemption amounts and inheritance tax rates for each class. For example, a state might classify spouses and children as Class A (often exempt or taxed at the lowest rates), siblings as Class B (moderate rates), and other heirs or non-relatives as Class C (highest rates). The specific classifications and their tax treatment vary by state.

Exemptions work by allowing a certain dollar amount to pass tax-free before the tax kicks in. The tax generally applies only to the portion of an inheritance above the exemption amount for that relationship class. For instance, the first $25,000 might be exempt for some New Jersey heirs, with tax starting on amounts above that threshold.

Rates may be flat (one rate applies to all taxable amounts) or graduated (rates increase at higher inheritance values) depending on the state. Pennsylvania, for example, uses flat rates that vary by relationship class, while some states apply a sliding scale where larger inheritances face progressively higher percentages.

Here’s a simplified sequence showing how inheritance tax works on a taxable inheritance: First, determine the total value of assets you received from the estate. Next, identify your relationship class and the exemption amount that applies to you. Subtract that exemption from your total inheritance value. Finally, apply the state’s rate schedule to the remaining taxable amount to determine the tax due.

State-by-state overview: how key inheritance tax rules differ

Details vary significantly by state and by the heir’s relationship to the deceased person. While broad patterns exist, the specific exemption thresholds, tax rate brackets, and filing requirements differ across the five states with inheritance tax.

The general pattern across states follows a similar logic: spouses are usually exempt from inheritance tax entirely. Direct descendants like children and grandchildren are often exempt or taxed at the lowest rates. Siblings may face moderate rates, while distant relatives and unrelated heirs typically face the highest rates and lowest exemptions.

Kentucky exempts surviving spouses, parents, children, grandchildren, and siblings from inheritance tax. Other beneficiaries face rates that can range from roughly 4% to 16% depending on the inheritance amount and relationship. The Kentucky Department of Revenue administers these rules.

Maryland charges a flat 10% inheritance tax rate but exempts surviving spouses, parents, grandparents, children, stepchildren, grandchildren, and siblings. Only more distant relatives and non-related beneficiaries pay the tax. Remember that Maryland also has a separate state estate tax.

Nebraska exempts immediate family members (spouses, children, parents) and applies rates ranging from about 1% to 18% for other heirs, with distant relatives and non-relatives facing the highest rates.

New Jersey exempts spouses, children, parents, and grandparents from inheritance tax. Siblings are also exempt. However, other beneficiaries—including nieces, nephews, and friends—can face rates from roughly 11% to 16% on amounts above certain exemption thresholds.

Pennsylvania is distinctive for having relatively broad taxation with few full exemptions beyond surviving spouses. Children and lineal heirs pay a flat 4.5% rate, siblings pay 12%, and other heirs pay 15%. These rates apply from the first dollar above minimal exclusions.

Iowa’s inheritance tax applied to deaths before January 1, 2025. Estates of people who die on or after that date will not owe Iowa inheritance tax, illustrating how the law can change and why staying current matters.

Readers should verify current numbers and filing rules directly with the state or a qualified professional because exemptions and brackets are periodically revised by state legislatures.

Is inherited cash or property taxable income?

Under current IRS rules, inherited cash and property themselves are generally not treated as ordinary taxable income at the federal level. When you inherit money or assets, you typically don’t report that inheritance as income on your federal tax return.

However, any income those assets produce after you inherit them can be taxable in the year received. Interest from an inherited bank account, dividends from inherited stocks, rental income from inherited property, or business income from an inherited business interest are all potentially taxable as ordinary income or investment income once they accrue to you as the new owner.

The step-up in basis concept is important for understanding future capital gains tax on inherited assets. For many non-retirement investments, the tax basis is adjusted to the fair market value at the date of death rather than the original purchase price the deceased person paid. This means if you later sell inherited property or investments, you may owe capital gains tax only on appreciation that occurs after you inherit—not on gains that accumulated during the decedent’s lifetime.

Retirement accounts such as traditional IRAs and 401(k)s work differently. Distributions to heirs are usually taxable income when withdrawn, subject to specific IRS rules and timelines. Inherited retirement accounts don’t receive a step-up in basis, and beneficiaries generally must take required minimum distributions (or empty the account within a specified period) and pay income tax on those withdrawals.

It’s important to distinguish clearly between inheritance tax (a state-level tax on the value received from an estate) and income or capital gains tax (federal and state taxes on earnings or gains after inheritance). These are separate obligations with different rules, rates, and filing requirements.

Inheritance tax returns and filing requirements

Filing inheritance tax returns is a crucial step for beneficiaries and heirs in states that impose this tax. In Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, beneficiaries are generally responsible for submitting inheritance tax returns to the appropriate state tax authority. These returns require detailed information about the decedent’s estate, including the total value of inherited assets, the nature of those assets, and the beneficiary’s relationship to the decedent. Each state has its own forms, deadlines, and documentation requirements, so it’s important to review the specific rules for your situation.

Inheritance tax rates and exemptions can vary significantly depending on the state and the beneficiary’s relationship to the deceased. For example, New Jersey has different exemption amounts and tax rates for siblings, nieces, nephews, and unrelated heirs. Accurately reporting the value of inherited assets and understanding which exemptions apply can help minimize your tax liability. Since the federal government does not impose a federal inheritance tax, these requirements are strictly at the state level.

Because inheritance tax laws and filing requirements can be complex, consulting a tax professional is highly recommended. A qualified advisor can help ensure your inheritance tax returns are completed correctly and submitted on time, helping you avoid penalties and take advantage of all available exemptions. Staying informed about your state’s inheritance tax rules is essential for beneficiaries and heirs to fulfill their obligations and protect their inherited assets.

How to reduce or avoid inheritance tax legally

Most households never face inheritance tax because of exemptions for spouses and close family members. However, larger or more complex estates in the five inheritance-tax states may benefit from thoughtful planning to minimize or avoid inheritance tax legally.

Several lawful strategies can reduce exposure to inheritance tax. These include moving from an inheritance-tax state to one without such a tax, structuring gifts during your lifetime rather than leaving assets at death, using certain types of trusts, and ensuring tax-favored assets like life insurance are designated appropriately.

Lifetime gifting can shift value out of a potential inheritance-tax base. The federal government allows annual gifts up to a specified exclusion amount per recipient ($18,000 in 2024, for example) without triggering gift tax. Larger gifts can count against the lifetime gift tax exemption. However, state rules may treat some gifts differently if made shortly before the decedent’s death—some states “look back” and include recent gifts in the taxable inheritance.

Irrevocable trusts can hold assets outside an individual’s estate and may help avoid or reduce inheritance tax depending on how they’re structured and what state law applies. These trusts can also control how and when heirs receive money, which may interact with state inheritance-tax rules in beneficial ways. Trust planning is complex and requires professional guidance.

Life insurance death benefits paid directly to named individual beneficiaries are often exempt from inheritance tax in many states. This can make life insurance an effective estate planning tool for passing wealth to future generations. However, rules vary, and readers should confirm state-specific treatment before relying on this exemption.

Effective planning usually blends several tactics and should be tailored with help from estate-planning attorneys and tax advisors who understand the laws in the relevant states. A financial advisor can also help coordinate planning across investments, insurance, and estate documents.

Legacy planning and inheritance tax

Legacy planning is a proactive approach to managing your estate and minimizing the impact of inheritance tax on your beneficiaries. By carefully structuring how your assets are transferred, you can reduce the taxable estate and help future generations receive more of your wealth. One effective strategy is to establish a trust, which can allow assets to pass to beneficiaries outside of probate and, in some cases, reduce or avoid inheritance tax liability. Trusts can also provide control over how and when assets are distributed, offering additional protection for your heirs.

Another key legacy planning tool is lifetime gifting. By making gifts to beneficiaries during your lifetime, you can take advantage of the federal gift tax exclusion, which allows you to transfer a certain amount each year to individuals without increasing your taxable estate. This can be especially useful in states with inheritance tax, as it may reduce the amount subject to taxation upon your death.

It’s also important to consider the potential impact of capital gains tax on inherited assets. When beneficiaries sell inherited property, the tax rate they pay on any appreciation is based on the fair market value at the date of death, not the original purchase price. This step-up in basis can significantly reduce capital gains tax liability, but planning ahead with a financial advisor ensures you maximize these benefits.

Working with a financial advisor or estate planning professional can help you develop a comprehensive legacy plan that addresses inheritance tax, capital gains tax, and other considerations. With the right strategies, you can minimize tax liability and ensure your assets are transferred efficiently and effectively to your chosen beneficiaries and future generations.

Navigating federal estate tax laws

While there is no federal inheritance tax, the federal government does impose a federal estate tax on estates that exceed a certain value. For 2026, the federal estate tax exemption is set at $15 million per individual, with tax rates ranging from 18% to 40% on the portion of the estate that exceeds this threshold. This means that only the largest estates are subject to federal estate tax, but it’s important to understand how these rules may affect your estate planning.

To navigate federal estate tax laws effectively, it’s essential to be aware of available exemptions and deductions. For example, charitable donations made from your estate can reduce the taxable estate, and gifts made during your lifetime may also help lower your estate’s value for tax purposes. The federal government also allows for portability of the estate tax exemption, meaning a surviving spouse can use any unused portion of their deceased spouse’s exemption, potentially doubling the amount that can pass tax-free to heirs.

Because the interplay between federal estate tax, state estate taxes, and inheritance tax can be complex, consulting a tax professional is highly recommended. An experienced advisor can help you understand your potential tax liability, identify strategies to minimize taxes, and ensure your estate plan is structured to provide the greatest benefit to your beneficiaries. By staying informed and planning ahead, you can help ensure a smooth transfer of assets and protect your legacy for future generations.

Practical steps if you’ve received or expect an inheritance

If you’ve already inherited assets or expect to inherit from someone living in an inheritance-tax state, taking organized steps early can prevent surprises and ensure you meet your obligations.

First, identify the deceased person’s state of residence and where major assets like real estate or a business are located. These locations—not where you live—determine which state’s inheritance-tax rules apply to you. You may owe state tax in a state you’ve never lived in simply because the decedent resided there or owned property there.

Gather documentation as early as possible. Key documents include the will or trust documents, the death certificate, recent account statements for bank and brokerage accounts, property records for real estate, and any correspondence from the estate’s executor or personal representative.

Communicate early with the executor or attorney handling the estate. Ask whether inheritance tax is expected and clarify who is responsible for filing inheritance tax returns and paying any tax due. In some cases, the estate pays inheritance tax on behalf of beneficiaries, but in other cases the beneficiary must pay directly.

Consider consulting a qualified tax professional, especially if the inheritance includes real estate in another state, a closely held business, or significant investment accounts. A tax professional or financial advisor can help you understand your specific tax liability and identify opportunities to minimize taxes legally.

Keep careful records of asset values as of the date of death. These fair market value figures affect not only inheritance tax calculations but also future capital gains tax reporting when you eventually sell inherited property. Request appraisals for real estate or business interests if formal valuations haven’t been obtained.

Frequently asked questions about inheritance tax

Do I owe inheritance tax if I live in a state without it but inherit from someone who lived in one that does? Yes, you may still owe inheritance tax. The tax applies based on where the deceased individual lived or where they owned property, not where you as the beneficiary reside. If you inherit from a Pennsylvania resident, for example, Pennsylvania’s inheritance tax rules apply to you regardless of your home state.

Can the same inheritance face both estate tax and inheritance tax? Yes, this is possible. Maryland, for instance, imposes both estate and inheritance taxes. The estate might pay estate tax before distribution, and then beneficiaries could also owe inheritance tax on what they receive. Additionally, a very large estate could owe federal estate tax on top of state-level taxes.

How long do I have to file an inheritance tax return? Filing deadlines vary by state. Pennsylvania generally requires filing within nine months of the decedent’s death, while other states have different timelines. Check with the relevant state’s revenue department or your tax professional to confirm specific deadlines and avoid penalties.

Do small inheritances trigger tax or filing obligations? It depends on the amount and your relationship to the deceased. Many states exempt small inheritances entirely for close relatives. For example, a few thousand dollars inherited from a parent in Pennsylvania might still technically be subject to the 4.5% rate, though minimum thresholds and administrative practices vary. Some states require filing even when no tax is due.

Who actually pays the inheritance tax—me or the estate? The legal liability typically rests with the beneficiary under state law. However, in some states, executors can choose to pay inheritance tax from estate funds on behalf of beneficiaries before distribution. This is often specified in the will or left to the executor’s discretion. Clarify this with the estate’s representative.

Do inheritance tax laws ever change? Yes, laws and exemption amounts change over time. Iowa’s repeal of its inheritance tax after January 1, 2025, is a specific illustration of how states can eliminate or modify these taxes. Relying on up-to-date tax advice from a qualified professional is crucial rather than assuming rules remain static.

Understanding how inheritance tax works can save you stress, money, and unexpected obligations. Whether you’re planning your own estate or preparing to inherit money from a loved one, knowing the rules in the relevant states helps you make informed decisions. Consider reaching out to an estate planning attorney or tax professional to review your specific situation and ensure you’re taking advantage of all available exemptions and planning strategies.