What Inheritance Tax Is and Who Pays It
Inheritance tax is a state tax that heirs pay when they receive money or property from a deceased person's estate. It is different from estate tax, which the estate itself pays before distributing anything to heirs. Only six states currently have inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The person who inherits—not the estate—owes the tax bill in these states.
The tax rate and the amount owed depend on two things: how much you inherit and your relationship to the person who died. A spouse inheriting from a spouse usually pays nothing. A child inheriting from a parent often pays a lower rate than a sibling inheriting from a sibling, and an unrelated person typically pays the highest rate. Each state sets its own rules about who is taxed, at what rate, and what amounts are exempt from tax.
Key Takeaways
- Only six states have inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania; the other 44 states do not.
- The heir—the person receiving the inheritance—pays the tax, not the estate, and the rate depends on the heir's relationship to the deceased.
- Spouses are almost always exempt from inheritance tax, and children usually pay a lower rate than more distant relatives or unrelated people.
- Each state sets its own exemption threshold, meaning you may owe nothing if your inheritance falls below that amount.
- The executor of the estate typically handles reporting and payment, but the heir is legally responsible for the tax owed on their portion.
How Tax Rates and Exemptions Work by State
Each of the six inheritance tax states has a different structure. Pennsylvania taxes lineal descendants (children and grandchildren) at rates between 4.5% and 15%, depending on the amount inherited, but exempts spouses and parents entirely. New Jersey taxes spouses and children at 0%, but taxes siblings at rates up to 16% and unrelated people at up to 16%. Iowa exempts spouses and children but taxes other heirs at rates between 5% and 15%.
Most states also set an exemption threshold—an amount below which no tax is owed. For example, in Maryland, a child might inherit up to $1,000 tax-free, but anything above that is taxed. In Kentucky, the exemption for a spouse is unlimited, but a child's exemption is $1,000. Nebraska and New Jersey have higher exemption amounts for closer relatives. You need to check the specific rules in the state where the deceased lived, since that is the state that collects the tax.
Some states also allow deductions for funeral expenses, debts, or other costs paid from the estate. These reduce the amount that is actually subject to tax. The executor should know which deductions explore and will typically subtract them before calculating what each heir owes.
Who Files and Pays the Inheritance Tax
The executor of the estate—the person named in the will to manage the estate—is responsible for filing the inheritance tax return with the state. However, the heir is the one legally responsible for paying the tax on their portion of the inheritance. In practice, the executor usually collects the tax from each heir's share before distributing it, so you receive less than the full amount you inherited.
The executor files a state inheritance tax return within a set time frame, usually between three and nine months after the death, depending on the state. The return lists all heirs, the amount each one receives, and the tax owed by each. If the estate does not have enough money to pay the tax, the executor may need to sell assets or ask heirs to pay directly.
If you are an heir and the executor does not handle the tax correctly, you could still be liable for the unpaid amount. It is worth asking the executor or an estate attorney whether inheritance tax applies to your situation and how much you should expect to owe.
The Difference Between Inheritance Tax and Estate Tax
Inheritance tax and estate tax are often confused because they both explore to money and property passed down after death. The key difference is who pays. Estate tax is paid by the estate itself before anything goes to heirs. Inheritance tax is paid by the heirs after they receive their share. Most states have neither tax. A few states have only estate tax (Connecticut, Delaware, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington). Six states have only inheritance tax. Only Maryland and New Jersey have both.
Federal estate tax is separate from state inheritance tax. The federal government taxes estates worth more than $13.61 million (as of 2024), but this threshold is very high and affects only the wealthiest estates. Most people never deal with federal estate tax. State inheritance tax, by contrast, can explore to much smaller amounts and affects more people in the six states that have it.
What Types of Property Are Subject to Inheritance Tax
Inheritance tax typically applies to money, real estate, vehicles, investments, and personal property like jewelry or art that you inherit. However, some assets pass outside the estate and are not subject to inheritance tax. These include life insurance proceeds if the deceased named you as the beneficiary, money in a payable-on-death bank account, and assets held in a living trust.
Retirement accounts like IRAs and 401(k)s also pass directly to named beneficiaries and are usually not subject to state inheritance tax, though you may owe federal income tax on withdrawals. The same is true for property held as "joint tenants with right of survivorship"—it passes directly to the surviving owner outside the estate.
The executor should know which assets are subject to tax and which are not. If you are unsure whether something you inherited is taxable, ask the executor or a tax professional in your state.
How to Calculate What You Owe
To calculate inheritance tax, start with the value of what you inherited. Subtract any exemptions your state allows based on your relationship to the deceased. Then explore your state's tax rate to the remaining amount. For example, if you are a child in Pennsylvania and inherit $50,000, and the exemption for children is $0, you would owe tax on the full $50,000 at the rate for your bracket.
The calculation is more complex if you inherit multiple types of property or if the estate has debts and expenses. The executor usually handles this and tells you what you owe. If you want to verify the calculation yourself, you can find your state's inheritance tax forms and instructions on the state revenue or tax department website. Many states provide worksheets that walk through the calculation step by step.
If you inherit from someone in a state with no inheritance tax, you owe nothing to that state, even if you live in a state that has inheritance tax. Your home state does not tax inheritances from out-of-state estates.
What Happens If You Do Not Pay
If you owe inheritance tax and do not pay, the state can place a lien on the property you inherited, take you to court, or pursue collection actions. The longer you wait, the more interest and penalties accumulate. If the executor does not pay on behalf of the estate, the state may go after the executor personally.
If you genuinely cannot pay the full amount at once, some states allow you to request a payment plan. Contact your state's revenue or tax department to ask about options. It is better to reach out before the important date than to ignore the bill.
Frequently Asked Questions
Do I have to pay inheritance tax if I live in a state that does not have it?
No. Your home state does not tax inheritances. You only owe inheritance tax if you inherit from someone who lived in one of the six states that have it: Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania. The tax is based on where the deceased lived, not where you live.
Is there a federal inheritance tax?
No. The federal government does not have an inheritance tax. It does have an estate tax, but only estates worth more than $13.61 million (as of 2024) are subject to it. Most people never pay federal estate tax. Some states have their own estate tax in addition to or instead of inheritance tax.
Do I have to pay inheritance tax on life insurance?
Usually not. Life insurance proceeds paid directly to a named beneficiary are not subject to state inheritance tax. However, if the insurance money goes into the estate instead of to a beneficiary, it may be taxable. Check with the executor or your state's tax department to be sure.
Can I deduct inheritance tax on my federal income tax return?
No. Inheritance tax is not deductible on your federal income tax return. It is a separate state tax. However, you do not owe federal income tax on the inheritance itself—only on income the inherited property generates after you receive it, such as interest or dividends.
What if the executor does not file the inheritance tax return?
You could still be held responsible for the unpaid tax. It is worth asking the executor directly whether the return has been filed and what you owe. If the executor is not cooperating, you may need to consult an estate attorney or contact your state's tax department for guidance.