When someone close to us passes away, sorting through the financial side can feel overwhelming. The good news is most people don’t need to stress about inheritance tax — at least not at the federal level.
In this guide, we’ll break down how the inheritance tax works in the U.S., so you know what to expect. We’ll cover who needs to pay it, how it’s calculated, and what makes it different from estate tax. Plus, we’ll touch on some real-life examples to help make things clearer.
At a glance:
- Inheritance tax is levied on beneficiaries, not the estate, and only at the state level.
- Only six states impose an inheritance tax for tax year 2024.
- Often, close relatives are exempt from paying inheritance tax.
- Inheritance tax rates differ depending on the value of the inheritance and the beneficiary’s relationship to the deceased.
What is inheritance tax?
The inheritance tax is a state tax levied on individuals who inherit money or property from a deceased person. Unlike the estate tax, which is paid by the decedent’s estate before assets are distributed, inheritance tax works by taxing the beneficiaries directly based on their share of the value of the assets they receive. However, not all states impose an inheritance tax, and tax rates vary based on state laws.
Who needs to pay inheritance tax?
Whether you need to pay taxes on your inheritance depends on several factors, including:
- The state where the decedent lived or owned property.
- Your relationship to the deceased person — close relatives like children or spouses are often exempt.
- The value of the assets you inherit.
States with inheritance tax
Currently, only six states impose an inheritance tax:
- Iowa (will no longer impose inheritance taxes starting in 2025)
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
In general, inheritance tax returns are due several months after the descendant’s date of death. Each state has its own tax rules, exemptions, inheritance tax rates, and inheritance tax return forms, so it’s important to check with the Department of Revenue in the relevant state if you have questions.
How inheritance tax is calculated
Inheritance tax rates vary based on several factors, including the state, the value of the assets inherited, and the beneficiary’s relationship to the deceased person. First, we need to determine the state’s exemption amount, if applicable, and then look at the tax rates.
To calculate the inheritance tax:
- Determine the taxable amount: Subtract any exemptions or deductions allowed by the state from the value of the assets.
- Apply the tax rate: Most states use a tiered tax rate structure, with higher rates for larger inheritances or for nonresident beneficiaries.
Inheritance tax rates by state
Click the link in the first column below for more information about each state:
| State | Inheritance Tax Rate |
|---|---|
| Iowa | 0%-2% |
| Kentucky | 0%-16% |
| Maryland | 0%-10% |
| Nebraska | 0%-15% |
| New Jersey | 0%-16% |
| Pennsylvania | 0%-15% |
Examples
- Kentucky: Close relatives like spouses, parents, children, and siblings often pay no inheritance tax, while more distant heirs (nieces, nephews, great-grandchildren, cousins, etc.) may face rates up to 16%.
- Nebraska: Immediate family members may pay 1% on amounts over $100,000, while other relatives (aunts, uncles, nieces, nephews, etc.) might pay up to 11% on amounts exceeding $40,000. Meanwhile, anyone else would pay up to 15% on amounts greater than $25,000.
- New Jersey: Exemptions apply to close relatives like surviving spouses and children, but other beneficiaries (siblings, sons- or daughters-in-law, etc.) can face rates ranging from 11% to 16%.
Estate tax vs. inheritance tax: What’s the difference?
- Inheritance tax: Paid by the beneficiaries on the assets they receive from the decedent’s estate (deceased’s estate). The tax liability is determined by the value of the inheritance and the beneficiary’s relationship to the deceased.
- Estate tax: Paid by the decedent’s estate before the assets are distributed to the beneficiaries.
Common inheritance tax exemptions
Many states offer inheritance tax exemptions to reduce or eliminate the tax liability for certain beneficiaries. Common exemptions include:
- Surviving spouses: Typically exempt in all states with inheritance tax.
- Children and other close relatives: Often receive partial or full exemptions depending on the state.
- Life insurance proceeds: Generally tax-free, except for certain scenarios, like interest earned before payout.
- Small business or farm property: Some states allow special exemptions for these assets to support estate planning.
Examples of inheritance tax calculations
Here are a few example calculations based on real numbers and tax rates from U.S. states in 2024.
Example 1: Spousal inheritance in Kentucky
- Scenario: A widow inherits assets from her deceased husband.
- Value of the assets: $500,000
- Beneficiary: Surviving spouse (exempt)
- Tax due: $0
Example 2: Sibling inheritance in Pennsylvania
- Scenario: A brother inherits assets from his sister.
- Value of the assets: $200,000
- Beneficiary: Sibling (not exempt)
- Tax rate: 12%
- Tax due: $24,000 ($200,000 x 12%)
Example 3: Non-relative inheritance in New Jersey
- Scenario: The deceased leaves assets to a friend.
- Value of the assets: $50,000
- Beneficiary: Friend (Class D beneficiary)
- Tax rate: 15% on amounts over under $700,000
- Tax due: $7,500 ($50,000 x 15%)
FAQs about inheritance tax
Is there a federal inheritance tax?
No, the federal government does not impose an inheritance tax. However, the IRS does levy a federal estate tax that applies to estates exceeding $13.61 million in 2024 ($13.99 million in 2025).
Do all states have inheritance tax?
No, only six states currently impose inheritance tax as of tax year 2024: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In 2025, Iowa will no longer impose an inheritance tax.
Do I have to pay inheritance tax if I live in a different state?
Possibly. If the decedent resided in a state with inheritance tax or owned property there, you may owe taxes regardless of your residency. If you find yourself in this situation, check the state laws where the decedent lived or owned assets.
Are spouses exempt from inheritance tax?
Yes, in all states with inheritance tax, surviving spouses are exempt. Some states also exempt close relatives, like children and parents.
How can I avoid inheritance tax?
Depending on your state and personal circumstances, there are a few ways to reduce or avoid inheritance taxes. Some examples include:
- Using estate planning tools, such as irrevocable trusts or gift tax exclusions.
- Leveraging life insurance, which is often tax-free.
- Working with a tax professional to optimize your strategy.
The bottom line
Navigating inheritance tax can be a chore, but understanding how it works is a good first step. Whether you’re a beneficiary wondering how your money might be taxed or handling a decedent’s estate, it’s always important to stay informed about state tax laws, tax rules, and available exemptions.
And don’t forget — proactive estate planning can help reduce your tax liability and ensure your loved ones receive their inheritance with minimal stress (and hopefully a minimal tax bill!).
