Inheritance tax is a state tax on money and property you receive from someone who has died

Inheritance tax is a tax you may owe when you inherit money, real estate, or other assets from a deceased person's estate. It is different from estate tax — inheritance tax is paid by the person receiving the inheritance, while estate tax is paid by the estate itself before anything is distributed. Only six states currently have inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The amount you owe depends on your relationship to the deceased, the value of what you inherit, and the rules of the state where the estate is settled.

Not all inheritances are taxed. Most states that have inheritance tax exempt close relatives like spouses, children, and sometimes grandchildren. More distant relatives and unrelated people may owe tax on larger amounts. The tax rate and the threshold at which you start owing money vary by state and by your relationship to the person who died.

Key Takeaways

  • Inheritance tax is owed by the person who receives money or property from a deceased person, and only six states currently impose it.
  • Spouses and minor children are usually exempt from inheritance tax, while more distant relatives and unrelated beneficiaries may owe tax on amounts above a certain threshold.
  • The tax rate and exemption amounts differ by state and depend on your relationship to the deceased person.
  • The executor of the estate is responsible for reporting inheritance tax to the state and ensuring taxes are paid before distributing assets to beneficiaries.
  • Federal inheritance tax does not exist, but the federal government does tax large estates through estate tax, which is a separate matter handled at the federal level.

Which states have inheritance tax and what the rates are

Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are the only states with inheritance tax. Each state sets its own tax rates, exemptions, and rules about who pays. For example, New Jersey taxes inheritances at rates ranging from 11 to 16 percent depending on the relationship to the deceased and the amount inherited, while Pennsylvania taxes only certain beneficiaries at rates up to 15 percent. Iowa and Kentucky have different thresholds and rates again.

In most of these states, spouses are completely exempt — they pay no inheritance tax no matter how much they inherit. Children, especially minor children, are often exempt or taxed at lower rates. Siblings, aunts, uncles, cousins, and unrelated people face higher tax rates and lower exemption amounts. You can find the specific rules for your state by contacting the state's department of revenue or the executor of the estate.

How inheritance tax differs from estate tax

Inheritance tax and estate tax are often confused because they both explore to property after someone dies, but they work in opposite directions. Estate tax is paid by the estate itself — the total value of everything the deceased person owned — before any money is given to heirs. Inheritance tax is paid by each individual who receives a share. Only the federal government and a handful of states have estate tax. Inheritance tax exists only in those six states mentioned above.

If an estate is large enough to owe federal estate tax, that tax is paid first from the estate's assets. Then, if the state where the estate is settled has inheritance tax, the beneficiaries may owe additional tax on what they receive. A person could theoretically owe both, though this is rare because federal estate tax only applies to very large estates, and most people do not inherit enough to trigger it.

Who is responsible for paying inheritance tax

The person who inherits the money or property is legally responsible for paying the inheritance tax owed on that inheritance. However, the executor of the estate — the person named in the will or appointed by the court to manage the estate — is responsible for reporting the inheritance to the state tax authority and ensuring the tax is paid. The executor may pay the tax from estate assets before distributing money to beneficiaries, or may require beneficiaries to pay their own tax.

In practice, the executor usually handles the paperwork and coordinates with the state. If you are a beneficiary, you will receive information from the executor about whether you owe tax and how much. You should keep all documents related to your inheritance in case the state requests proof of the value of what you received.

How inheritance tax is calculated

Inheritance tax is calculated based on the fair market value of the property or money you inherit at the time of the person's death. The executor or a professional appraiser determines this value. Once the value is known, the state applies its tax rate based on your relationship to the deceased and the amount you inherited.

Most states allow an exemption — a dollar amount below which no tax is owed. For example, if your state exempts the first $40,000 and you inherit $100,000, you only owe tax on $60,000. The exemption amount varies by state and by your relationship to the deceased. Spouses typically have the highest exemptions or are fully exempt. Distant relatives have lower exemptions and higher tax rates.

When inheritance tax is due and how to pay it

The important date to pay inheritance tax varies by state but is usually between 6 and 12 months after the person's death. The executor receives a notice from the state tax authority with the important date and the amount owed. If the executor does not pay on time, penalties and interest accrue. Some states allow the executor to request an extension if the estate is complicated or if assets have not yet been sold.

Payment is made directly to the state tax authority, usually by check or electronic transfer. The executor files a tax return with the state showing the value of the estate, the names and relationships of all beneficiaries, and the tax owed by each. Once the state receives payment and approves the return, the executor can distribute the remaining assets to the beneficiaries. If a beneficiary is responsible for paying their own tax, they receive a bill from the state and must pay by the important date.

Situations where you may not owe inheritance tax

You will not owe inheritance tax if you live in a state that does not have it, or if you inherit from someone who lived in a state without inheritance tax. You also will not owe if you are exempt under your state's rules — for example, if you are the spouse of the deceased, or if the total value of your inheritance is below your state's exemption threshold. Some states exempt charitable organizations and religious institutions from inheritance tax.

If you inherit property that was already taxed as part of the deceased person's federal estate tax, you may be able to claim a credit against your state inheritance tax. This prevents double taxation on the same asset. The executor should discuss this with a tax professional to may support you receive any credits you are may have access to to.

Frequently Asked Questions

Do I have to pay inheritance tax if I inherit from a parent?

It depends on which state the estate is settled in and your state's specific rules. Most states that have inheritance tax exempt children from paying tax on inheritances from parents, or tax them at a much lower rate than more distant relatives. Spouses are almost always exempt. Contact the executor or your state's department of revenue to find out whether you owe tax on your specific inheritance.

What is the difference between inheritance tax and income tax on inherited money?

Inheritance tax is a state tax on the transfer of property after death. Income tax on inherited money is different — in most cases, you do not owe federal income tax on money you inherit, even if it is a large amount. However, if inherited money earns interest or dividends after you receive it, you do owe income tax on that earnings. Some states also tax income from inherited property.

Can I reduce my inheritance tax by giving money away before I die?

This question relates to estate planning and federal gift tax, not state inheritance tax. Inheritance tax is owed by the person receiving the inheritance, not by the person who died. If you are concerned about reducing taxes on your heirs, you should speak with an estate planning attorney or tax professional about strategies that may be available to you.

What happens if the executor does not pay inheritance tax on time?

If inheritance tax is not paid by the important date, the state charges penalties and interest on the unpaid amount. The executor may also face personal liability. In some cases, the state can place a lien on the estate's assets or pursue collection against the beneficiaries. The executor should contact the state tax authority when ready if payment will be late and request an extension if possible.

Is there federal inheritance tax?

No. The federal government does not have an inheritance tax. It does have an estate tax that applies to very large estates, but that is paid by the estate before distribution to heirs, not by the heirs themselves. Only six states have inheritance tax. If you live in a state without inheritance tax, you will not owe any state inheritance tax on money you inherit.