Inheritance Tax: What It Is, How It's Calculated, and Who

Pays It
investopedia.com/terms/i/inheritancetax.asp

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 estate of the deceased.

The inheritance tax is not common in the U.S. In fact, just six states have an inheritance tax
as of 2023, and the taxation depends on the state in which the deceased lived or owned
property, the value of the inheritance, and the beneficiary's relationship to the decedent.1

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 will pay inheritance tax depends on the amount of the inheritance and
your relationship to the deceased.

Understanding Inheritance Taxes

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
bequest's beneficiaries.

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.2

Inheritance taxes are collected by six U.S. states: Iowa, Kentucky, Maryland, Nebraska, New
Jersey, and Pennsylvania. Whether your inheritance will be taxed, and at what rate, depends
on its value, your relationship to the person who passed away, and the prevailing rules where
you live.3

Inheritance tax may be assessed by the state or states where the decedent lived or owned
property.1

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How Inheritance Taxes Are Calculated
An inheritance tax, if due, is applied only to the portion of an inheritance that exceeds an
exemption amount. Above those thresholds, tax is usually assessed on a sliding basis. Rates
typically begin in the single digits and rise to between 15% and 18%. Both the exemption you
receive and the rate you're charged may vary with your relationship to the deceased—more
so than with the value of assets you are inheriting.3

As a rule, the closer your familial relationship to the deceased, the higher the exemption and
the lower the rate you'll pay. Surviving spouses are exempt from inheritance tax in all six
states.3 Domestic partners, too, are exempt in New Jersey.45 Descendants are only subject
to an inheritance tax in Nebraska and Pennsylvania.6

Life insurance payable to a named beneficiary is not typically subject to an inheritance tax. It
may be subject to an estate tax if the estate or a revocable trust was the beneficiary of the
policy.7

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 property
passes to the recipients.8
In Maryland, inheritances from estates smaller than $50,000 are also exempt.9

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 exempt up to $500. The tax rate on others ranges from 2% to 6%
of inheritance. Iowa's inheritance tax will be repealed in 2025.108
Kentucky: Immediate family members (spouses, parents, children, siblings) are
exempt; other recipients exempt up to $500 or $1,000. The tax is on a sliding scale
based on the size of inheritance and includes a minimum amount, plus a percentage
ranging from 4% to 16%.11
Maryland: Immediate family (parents, grandparents, spouses, children, grandchildren,
siblings) and charities exempt; other recipients exempt up to $1,000. The tax rate is
10%.9
Nebraska: Spouses and charities fully exempt;12 immediate family (parents,
grandparents, siblings, children, grandchildren) exempt up to $100,000, starting in
2023. Other relatives are exempt up to $40,000 and unrelated heirs up to $25,000.13
Nebraska lowered its tax rates to 1%, 11%, and 15% in 2023.141516

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 New Jersey: Immediate family (spouse, children, parents, grandparents,
grandchildren) and charitable organizations exempt. Siblings and sons/daughters-in-
law exempt up to $25,000. The tax rate ranges from 11% to 16%, depending on the
size of inheritance and the familial relationship.45
Pennsylvania: Spouse and minor children 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.17

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.18

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.3

The distinction between an estate tax and an inheritance tax with identical rates and
exemptions might make no difference to a sole heir. But in some rare situations, an
inheritance could be subject to both estate and inheritance taxes.

According to the Internal Revenue Service (IRS), federal estate tax returns are only required
for estates with values exceeding $12.92 million in 2023 ($13.61 in 2024).19 If the estate
passes to the spouse of the deceased person, no estate tax is assessed.220

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 faces the 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.

Heirs may also face a state estate tax. As of 2023, 12 states and one district still collected
estate taxes: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Massachusetts,
Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington.10

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.3

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Maryland is currently the only state that imposes both an estate tax and an inheritance tax.3

Avoiding Inheritance Tax

While there are a lot of exceptions and exemptions for inheritance taxes, especially for
spouses and children, residents with significant assets in a state with one may still want to
minimize the exposure for heirs.

One common strategy is to buy a life insurance policy in the sum you wish to bequeath and
make the person you want to leave it to the beneficiary of the policy. The death benefit from
an insurance policy is not subject to inheritance taxes.21

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 for the distribution of the funds when you establish the trust.

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 $12.92 million over a lifetime in 2023, and $13.61 million over a
lifetime as of 2024.222 There's no 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 $12.92
million in 2023 and larger than $13.61 million in 2024.222 The tax is assessed only on the
portion of an estate that exceeds those amounts. The rate is on a sliding scale, from 18% to
40%.23

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.1 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.

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How Is Inheritance Tax Calculated?
Inheritance tax rules vary by state. Most states divide beneficiaries into different classes,
depending on their family relationship to the deceased (immediate, lineal, unrelated), and set
exemptions and tax rates based on those categories. Most states only apply tax to an
inheritance above a certain amount. They then charge a percentage of this sum, either as a
flat rate or graduated.

The Bottom Line

Inheritance taxes only affect 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, parents are often exempt are
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.

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