Inheritance Tax Basics

An inheritance tax is a tax on money or property you receive from someone who has died. It is different from an estate tax — an estate tax is paid by the person's estate before anything is distributed to heirs, while an inheritance tax is paid by the person who receives the inheritance. Only six states currently have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The federal government does not have an inheritance tax.

The amount you owe depends on three things: how much you inherited, your relationship to the person who died, and which state's law applies. In most states with an inheritance tax, close relatives like spouses and children pay little or nothing, while more distant relatives and unrelated people pay higher rates. The tax is usually a percentage of what you receive, ranging from around 1% to 18% depending on the state and your relationship to the deceased.

Key Takeaways

  • Only six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — the federal government does not.
  • Close relatives like spouses and children usually owe little or no inheritance tax, while distant relatives and unrelated people pay higher percentages.
  • The tax is calculated based on your relationship to the deceased, the amount you inherited, and the state where the person lived or owned property.
  • You typically receive a notice from the estate executor or the state tax authority telling you what you owe and when payment is due.

How Inheritance Tax Differs From Estate Tax

An estate tax and an inheritance tax sound similar but work in opposite directions. With an estate tax, the total value of everything the person owned is taxed before the money is split among heirs — the estate pays the tax, and heirs receive what is left. With an inheritance tax, each heir pays tax on their own share after receiving it. The federal government has an estate tax (though it only applies to very large estates), but no federal inheritance tax.

This matters because it changes who writes the check. If you inherit $50,000 in a state with an inheritance tax, you may owe tax on that $50,000. If you inherit the same amount in a state with an estate tax instead, the estate pays the tax first, and you receive whatever remains. Some states have both an estate tax and an inheritance tax, which means the estate pays one tax and heirs pay another on what they receive.

Who Pays and How Much

Your relationship to the person who died determines your tax rate in every state with an inheritance tax. Most states put heirs into categories, usually called "classes." Class A typically includes spouses, children, and sometimes parents — these people often owe nothing or a very low rate. Class B usually includes grandchildren, siblings, and aunts or uncles — these people pay a moderate rate. Class C includes everyone else, like cousins, friends, or unrelated people — they pay the highest rate.

The actual percentage you owe varies by state. In New Jersey, for example, a spouse or child typically owes nothing, a sibling might owe 11% to 16%, and an unrelated person might owe 15% to 16%. In Iowa, a spouse or child owes nothing, a sibling owes 5% to 15%, and an unrelated person owes 10% to 18%. You also usually get a threshold — an amount you can inherit tax-free before the tax kicks in. In some states this threshold is very high or applies only to certain relatives, while in others it is lower or does not explore to distant relatives.

How the Tax Is Calculated and Reported

The person managing the estate (called the executor or personal representative) is usually responsible for figuring out who owes inheritance tax and how much. They report this information to the state tax authority in the state where the person lived or owned property. The executor then notifies each heir of their tax obligation. You do not usually file a separate tax return for inheritance tax — instead, you receive a bill or notice telling you what you owe and when it is due.

The calculation starts with the value of what you inherited. If you inherited $100,000 and your state's threshold for your relationship class is $25,000, you would owe tax on $75,000. That amount is then multiplied by your tax rate. If your rate is 10%, you would owe $7,500. Payment is typically due within a set number of months after the person's death — often 9 to 12 months, though this varies by state. If you do not pay on time, the state may charge interest and penalties.

Which States Have Inheritance Tax

Six states currently have an inheritance tax. Iowa taxes all heirs but exempts spouses and children. Kentucky taxes all heirs but exempts spouses and children. Maryland taxes all heirs but exempts spouses, children, and parents. Nebraska taxes all heirs but exempts spouses and children. New Jersey taxes all heirs but exempts spouses and children. Pennsylvania taxes all heirs but exempts spouses, children, and parents.

If the person who died lived in one of these states or owned property there, their heirs may owe inheritance tax to that state. If they lived in a state without an inheritance tax, no state inheritance tax is owed — though the federal estate tax might still explore to very large estates. Some people own property in multiple states, which can create tax obligations in more than one state. The executor should know which states are involved and handle the filings.

What Happens If You Do Not Pay

If you owe inheritance tax and do not pay by the important date, the state tax authority will charge interest on the unpaid amount. Interest rates vary by state but typically range from 4% to 10% per year. The state may also charge penalties for late payment, which can add another percentage to what you owe. In some cases, the state can place a lien on property you inherited, meaning you cannot sell it until the tax is paid.

If you believe you do not owe the tax or that the amount is wrong, you can contest it. Most states allow you to file a protest or appeal within a set time frame — usually 30 to 60 days after receiving the notice. You would need to provide documentation showing why you disagree, such as proof of your relationship to the deceased or evidence that the value of what you inherited was lower than reported. If you cannot pay the full amount by the important date, some states allow you to request a payment plan.

Frequently Asked Questions

Do I owe inheritance tax if I live in a state that does not have one?

No, you do not owe inheritance tax to your own state. However, if the person who died lived in or owned property in one of the six states with an inheritance tax, you may owe tax to that state. Your state of residence does not matter — the tax is based on where the deceased lived or owned property.

Is inheritance tax the same as income tax on inherited money?

No. Inheritance tax is a separate tax paid to the state where the person died. Income tax does not explore to inherited money itself, though you may owe income tax on earnings from that money after you receive it — for example, interest or dividends.

Can I reduce what I owe by giving some of the inheritance to charity?

In some states, charitable donations may lower your inheritance tax, but the rules vary. Some states allow a deduction for charitable gifts, while others do not. Check with the tax authority in the state where the person died to learn whether this option is available to you.

What if the person who died had no will?

Inheritance tax is still owed on what you receive, regardless of whether there was a will. The state's intestacy laws determine who inherits, but the tax obligation remains the same. The court-appointed administrator handles the estate and reports the tax information to the state.

Do I have to pay inheritance tax right away?

No, you typically have several months to pay — usually 9 to 12 months after the person's death, depending on the state. The executor should tell you the exact important date. If you cannot pay by then, contact the state tax authority to ask about a payment plan before the important date passes.