What inheritance tax is

Inheritance tax is a state tax on money or property you receive from someone who has died. It is different from estate tax — estate tax is paid by the person's estate before anything is distributed to heirs, while inheritance tax is paid by the person receiving the inheritance. Not all states have it, and the rules vary significantly by state and by your relationship to the person who died.

When you inherit money, real estate, or other assets, some states charge a tax on that transfer. The tax rate and the amount you owe depend on which state the deceased person lived in, which state you live in, and how you were related to them. A spouse or child might owe nothing, while a distant relative or unrelated person might owe a percentage of what they received.

The key thing to understand is that inheritance tax is separate from federal income tax. The federal government does not tax inheritances. Only certain states do, and only under specific conditions.

Key Takeaways

  • Only six states currently have inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
  • Spouses are almost always exempt from inheritance tax, and most states exempt children and grandchildren as well.
  • The tax rate depends on your relationship to the deceased and the amount you inherit, ranging from 1% to 18% in states that have it.
  • You typically owe inheritance tax in the state where the deceased person lived, not where you live.
  • The person managing the estate (the executor) usually handles reporting and payment, though you may need to file a separate return.

Which states have inheritance tax

Six states currently impose inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If the person who died lived in any other state, there is no state inheritance tax to pay, regardless of where you live or how much you inherited.

The rules in each of these six states are different. Iowa taxes all heirs except spouses and lineal descendants (children and grandchildren). Kentucky exempts spouses, children, grandchildren, and parents. Maryland taxes only those not in a close family relationship. Nebraska and Pennsylvania have their own schedules. New Jersey has one of the broadest taxes, applying to most heirs except spouses and children under certain conditions.

If you inherited from someone in one of these states, you need to know that state's specific rules, not just that the state has an inheritance tax. The executor of the estate should inform you, but you can also contact that state's department of revenue directly.

Who is exempt from inheritance tax

Spouses are exempt from inheritance tax in all six states that have it. This is the broadest exemption across the board.

Children and grandchildren are exempt or taxed at a much lower rate in most states. Iowa, Kentucky, Maryland, and Nebraska all exempt lineal descendants (children, grandchildren, and sometimes great-grandchildren). New Jersey and Pennsylvania tax children at lower rates than other heirs, but do not fully exempt them. The exact definition of "child" matters — biological children, adopted children, and stepchildren are usually included, but the rules vary.

Parents, siblings, aunts, uncles, and cousins face higher tax rates or no exemption at all, depending on the state. Unrelated people (friends, unmarried partners, charities in some cases) may face the highest rates or be taxed differently.

The executor of the estate should provide you with information about your tax status based on your relationship to the deceased. If you are unsure, contact the state revenue department in the state where the deceased lived.

How much inheritance tax you owe

The amount of inheritance tax depends on three things: which state, your relationship to the deceased, and how much you inherited. There is no federal threshold that triggers the tax — it applies to inheritances of any size in the states that have it, though some states set minimum amounts below which no tax is due.

Tax rates range from 1% to 18% depending on the state and your relationship to the deceased. A spouse might owe 0%, a child might owe 1% to 12%, and a distant relative might owe 15% to 18%. Some states use a sliding scale — the more you inherit, the higher the percentage you pay.

For example, in Pennsylvania, a child inherits tax-free, but a sibling pays 12% on amounts over $25,000. In New Jersey, a child pays 11% to 16% depending on the amount, while a niece or nephew pays 13% to 18%.

The executor typically calculates what you owe based on the value of what you received. You should receive a statement showing the calculation. If the numbers do not make sense, ask the executor for a breakdown or contact the state revenue department.

When and how to pay inheritance tax

The executor of the estate is responsible for filing an inheritance tax return with the state where the deceased lived, usually within a set timeframe (often 9 months after death, though this varies by state). The executor may also be responsible for paying the tax from the estate's assets before distributing money to heirs.

In some cases, you may receive your inheritance first and then be billed for your share of the tax. In other cases, the tax is paid from the estate before you receive anything, which means your inheritance is reduced by the amount of tax owed. Ask the executor which approach will be used in your situation.

If you owe tax directly (rather than the executor paying it from the estate), you will typically receive a bill from the state revenue department. Pay it by the deadline listed on the bill to avoid penalties and interest. The deadline is usually tied to the date of death, not the date you receive the money.

Inheritance tax versus estate tax

Estate tax and inheritance tax are often confused because they both apply to property transferred after death, but they work differently. Estate tax is paid by the estate itself before heirs receive anything. Inheritance tax is paid by the person who inherits.

The federal government has an estate tax, but it only applies to very large estates — $13.61 million or more in 2024 (this threshold changes yearly). Most people do not owe federal estate tax. Some states also have their own estate tax in addition to or instead of inheritance tax.

If you inherited from someone, you are more likely to owe inheritance tax (if the deceased lived in one of the six states) than estate tax. The executor should clarify which taxes apply to the estate and which apply to you personally.

Frequently Asked Questions

Do I owe federal inheritance tax?

No. The federal government does not tax inheritances. Only six states have inheritance tax, and only if the deceased person lived in one of those states. If the estate is very large (over $13.61 million in 2024), the estate itself may owe federal estate tax, but that is paid by the estate, not by you.

What if the person who died lived in one state and I live in another?

You owe inheritance tax based on where the deceased person lived, not where you live. If they lived in Pennsylvania and you live in California, Pennsylvania's inheritance tax rules apply. If they lived in California, there is no state inheritance tax to pay.

Can I deduct inheritance tax from my income taxes?

No. Inheritance tax is not deductible on your federal income tax return. It is a separate state tax on the transfer of property. The money you inherit is also not considered income for federal tax purposes, so you do not owe federal income tax on it either.

What if I refuse to accept an inheritance?

If you formally disclaim (refuse) an inheritance, you typically do not owe inheritance tax on it. The disclaimed property passes to the next person in line. This must be done within a specific timeframe (usually 9 months after death) and must be done formally — simply not taking the money is not enough. Consult an attorney if you are considering this option.

Does the executor have to tell me how much inheritance tax I owe?

Yes. The executor should provide you with a clear accounting of what you inherited and what taxes apply. If you do not receive this information, ask for it. You can also contact the state revenue department in the state where the deceased lived to verify the calculation.