What Is Inheritance Tax?
An inheritance tax is a tax imposed by some states on the recipients of inherited assets. In contrast to an estate tax, an inheritance tax is paid by the recipient of a bequest rather than the deceased's estate.
The inheritance tax is not common in the U.S. In fact, just six states have an inheritance tax as of 2024. The taxation of an inheritance depends on the state in which the deceased lived or owned property, the value of the inheritance, and the beneficiary's relationship to thedecedent.
Key Takeaways
- Inheritance tax is a levy on assets inherited from a deceased person.
- An inheritance tax is levied on the value of the inheritance received by the beneficiary, and it is paid by the beneficiary.
- There is no federal inheritance tax.
- Inherited assets may be taxed for residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
- Whether you may pay inheritance tax depends on the amount of the inheritance, your relationship to the decedent, and the state in which the decedent lived.
Understanding Inheritance Taxes
There is no federal inheritance tax in the U.S. While the U.S. government taxes large estates directly—imposing estate taxes and, if relevant, income tax on any earnings from the estate—it does not impose an inheritance tax on those who receive assets from an estate.
Inheritance taxes are collected by six U.S. states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. However, Iowa will phase out its inheritance tax by 2025.
When the Tax Applies
Whether aninheritancewill be taxed, and at what rate, depends on its value, the relationship of the beneficiary to the person who passed away, and the prevailing rules regarding where the decedent (the person with the estate) lived.
That is, inheritance taxes may be assessed by the state or states where the decedent lived or owned property if those states impose an inheritance tax. As a beneficiary, your state's inheritance tax rule, if any, doesn't apply.
In other words, if you receive an inheritance from someone who lived in a state with no inheritance tax, you won't pay an inheritance tax even if you live in a state with an inheritance tax.
Normally, your inheritance must be greater than a certain minimum amount for you to owe taxes on it. That means that few people (only around 2%) typically ever have to pay an inheritance tax.
An inheritance tax is not the same as an estate tax. An estate tax is assessed on the estate itself before its assets are distributed, while an inheritance tax may be imposed on the beneficiaries of a bequest.
How Inheritance Taxes Are Calculated
If due, an inheritance tax is applied only to the portion of an inheritance that exceeds an exemption amount. Above that threshold, tax is usually assessed on a sliding basis. Rates typically begin in the single digits and rise to between 15% and 18%.
For example, if a state charges an inheritance tax on bequests larger than $100,000 and you receive $150,000, you could owe taxes on $50,000. Say that the tax rate is 10%. The calculation for the inheritance tax owed would be:
- $50,000 x .10 = $5,000
- Tax bill is $5,000
Remember that not everyone must pay inheritance taxes, even in states that levy them. Close relatives typically receive higher exemptions and lower rates. Surviving spouses are exempt from inheritance tax in all six states mentioned above.
Domestic partners, too, are exempt in New Jersey and Maryland. Descendants such as children and grandchildren are only subject to an inheritance tax in Nebraska and Pennsylvania.
Important
Life insurance payable to a named beneficiary typically is not subject to an inheritance tax. It may be subject to an estate tax if the estate or a revocable trust was the policy's beneficiary.
Inheritance Tax Thresholds
In most states, an inheritance tax applies to bequests above a certain amount. In a few instances, the size of the estate is significant. For example:
- In Iowa, if the estate is valued at less than $25,000 then no tax is due when the property passes to the recipients.
- In Maryland, inheritances from estates smaller than $50,000 are also exempt.
There are further exemptions for heirs, depending on how closely related they were to the deceased. Here are the details by state:
- Iowa:Spouses, lineal ascendants (parents, grandparents, and great-grandparents), and lineal descendants (children, stepchildren, grandchildren, and great-grandchildren) are exempt; charities are exempt up to $500. The tax rate on others ranges from 2% to 6% of inheritance. Iowa's inheritance tax will be repealed in 2025.
- Kentucky:Immediate family members (spouses, parents, children, siblings) are exempt; other recipients are exempt up to $500 or $1,000. The tax is on a sliding scale based on the size of the inheritance and includes a minimum amount plus a percentage ranging from 4% to 16%.
- Maryland:Immediate family (parents, grandparents, spouses, children, grandchildren, siblings) and charities are exempt, as are beneficiaries from small estates valued at $50,000 or less. Other recipients are exempt up to $1,000. The tax rate is 10%.
- Nebraska: Spouses and charities are fully exempt. Immediate family (parents, grandparents, siblings, children, grandchildren) are exempt up to $100,000 (as of 2024). Other relatives are exempt up to $40,000 and unrelated heirs up to $25,000. Nebraska lowered its tax rates to 1%, 11%, and 15% in 2023.
- New Jersey:Immediate family (spouse, children, parents, grandparents, grandchildren) and charitable organizations are exempt. Siblings and sons/daughters-in-law are exempt up to $25,000. The tax rate ranges from 11% to 16%, depending on the size of the inheritance and the familial relationship.
- Pennsylvania:Spouse and minor children are exempt. Adult children, grandparents, and parents are exempt up to $3,500. The tax rate is 4.5%, 12%, or 15%, depending on the relationship.
Tip
Consider giving money gradually, while you're alive, to recipients—instead of a lump-sum bequest upon your death. With the exception of Connecticut, states usually don't tax gifts.
Inheritance Tax vs. Estate Tax
Inheritance taxes and estate taxes are often lumped together. However, they are two distinct forms of taxation.
Both levies are based on the fair market value of a deceased person's property, usually as of the date of death. But an estate tax is levied on the value of the decedent's estate, and the estate pays it. In contrast, an inheritance tax is levied on the value of an inheritance received by the beneficiary, and it is the beneficiary who pays it.
The distinction between an estate tax and an inheritance tax with identical rates and exemptions might make no difference to a sole heir. However, in some rare situations, an inheritance could be subject to both estate and inheritance taxes.
Federal Estate Tax
According to the Internal Revenue Service (IRS), federal estate tax returns are only required for estates with values exceeding $13.61 million in 2024 (up from $12.92 million in 2023). If the estate passes to the spouse of the deceased person, no estate tax is assessed.
If a person inherits an estate large enough to trigger the federal estate tax, the decedent lived or owned property in a state with an inheritance tax, and the bequest is not fully exempt under that state's law, the beneficiary facesthe federal estate tax as well as a state inheritance tax. The estate is taxed before it is distributed, and the inheritance is then taxed at the state level.
State Estate Tax
Heirs may also face a state estate tax. As of 2024, 12 states and one district still collected estate taxes: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, RhodeIsland, Vermont, and Washington.
If you live in a state with an estate tax, you're more likely to feel its pinch than you are to pay federal estate tax. The exemptions for state and district estate taxes are all less than half those of the federal assessment. Some state estate tax exemptions may be as low as $1 million.
Note
Maryland is currently the only state that imposes both an estate tax and an inheritance tax.
Avoiding Inheritance Tax
While there are many exceptions and exemptions for inheritance taxes, especially for spouses and children, residents with significant assets in a state with an inheritance tax may still want to minimize the exposure for their heirs.
One common strategy is to buy a life insurance policy equal to the sum you wish to bequeath and make the person you want to leave it to the policy's beneficiary. The death benefit from an insurance policy is not subject to inheritance taxes.
You could also put assets in a trust—preferably an irrevocable trust. This effectively removes them from your estate and their classification as an inheritance upon your death. You can set up a schedule to distribute the funds when you establish the trust.
Warning
Trusts are complicated and they must be set up and worded carefully to comply with state tax laws. Set up a trust with the help of a trust and estates attorney.
How Much Can You Inherit Without Paying Taxes?
The six U.S. states with inheritance taxes provide varying exemptions based on the size of the inheritance and the familial relationship of the heir to the deceased. The federal estate tax exemption exempts $13.61 million over a lifetime as of 2024. In most cases, you will not owe income tax on inheritances.
What Is the Federal Inheritance Tax Rate?
There is no federal inheritance tax—that is, a tax on the sum of assets an individual receives from a deceased person. However, a federal estate tax applies to estates larger than $13.61 million in 2024. The tax is assessed only on the portion of an estate that exceedsthat amount. The tax rate applied is based on a sliding scale, from 18% to 40%.
Do Beneficiaries Have to Pay Taxes on Inheritance?
Whether beneficiaries have to pay taxes on inheritance depends on their familial relationship to the deceased and on the state where the decedent lived or owned property. Only estates or property located in one of six states that impose inheritance taxes may be subject to them.
Surviving spouses are always exempt from inheritance taxes. Other immediate relatives, like the deceased's parents, children, and siblings, are exempt to varying degrees, depending on the state. Inheritance taxes mainly affect more distant relatives and unrelated heirs.
The Bottom Line
Inheritance taxes only affect bequests made by residents in six states. And they mainly apply to distant relatives or those completely unrelated to the deceased. Spouses are always exempt from paying inheritance tax, and immediate family members like children are often exempt as well.
Still, inheritance taxes can kick in at relatively small inheritance amounts—sometimes as little as $500. Those considering bequests that could be subject to an inheritance tax might consider estate-planning strategies including gifts, insurance policies, and irrevocable trusts.
