What inheritance tax is and who pays it

Inheritance tax is a state-level tax on money or property you receive from someone who has died. It is not a federal tax — the U.S. government does not collect it. Only six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The amount you owe depends on your relationship to the person who died, the value of what you inherited, and the rules of the state where the person lived or owned property.

The person who died does not pay the tax — you do, when you receive the inheritance. The tax is calculated on your share of the estate, not on the whole estate. If you inherit $50,000 in a state with inheritance tax, you may owe tax on that $50,000, but your sibling who inherited $30,000 would owe tax only on their $30,000.

Inheritance tax is different from estate tax, which is a federal tax on the total value of everything a person owned when they died. Estate tax applies only to very large estates — the federal threshold is $13.61 million in 2024, and most people never encounter it. Some states also have their own estate tax, separate from inheritance tax. A few states have both.

Key Takeaways

  • Inheritance tax is collected by six states only: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
  • You owe tax on the value of what you inherit, not on the total estate, and the rate depends on your relationship to the person who died.
  • Spouses are exempt from inheritance tax in all six states, and most states exempt children, parents, and grandparents as well.
  • The person who died does not pay the tax — the person receiving the inheritance does, usually within a set time after the death.
  • Inheritance tax is separate from federal estate tax, which applies only to very large estates and is collected by the federal government.

Which relationships are taxed and which are exempt

All six states that have inheritance tax exempt spouses completely. You will owe no tax on anything you inherit from your spouse, no matter the amount. Most of the six states also exempt direct descendants — children and grandchildren — though the rules vary slightly.

Iowa, Kentucky, and Pennsylvania exempt children and grandchildren entirely. Maryland and Nebraska exempt them but may tax the inheritance if the value exceeds a threshold (in Maryland, amounts over $25,000 per child are taxed at lower rates). New Jersey exempts children but taxes grandchildren at the lowest rate unless they are direct descendants of a deceased child.

Parents and grandparents are exempt in most states. Siblings, aunts, uncles, cousins, and unrelated people face higher tax rates. In New Jersey, an unrelated person inheriting $10,000 could owe tax at 15 percent, while a sibling inheriting the same amount might owe 12 percent. The exact rates and thresholds vary by state and relationship.

Tax rates and thresholds in each state

Iowa taxes lineal descendants (children, grandchildren) at 0 percent if they inherit less than $25,000, then 1 to 6 percent on amounts above that. Siblings pay 5 to 10 percent, and unrelated people pay 10 to 15 percent. The state allows an exemption of $1,500 per person before any tax is calculated.

Kentucky exempts direct descendants, spouses, and parents entirely. Siblings pay 4 to 16 percent depending on the amount inherited. Unrelated people pay 6 to 16 percent. There is a $1,000 exemption for all taxpayers.

Maryland exempts spouses, children, and grandchildren on the first $25,000 of inheritance. Above that, children and grandchildren pay 0 to 10 percent depending on the amount. Siblings and more distant relatives pay higher rates. There is a $1,000 exemption.

Nebraska exempts spouses, children, grandchildren, parents, and grandparents. Siblings pay 1 to 18 percent, and unrelated people pay 1 to 18 percent. The state allows a $40,000 exemption for direct descendants and $15,000 for others.

New Jersey exempts spouses and direct descendants (children and grandchildren of the deceased). Siblings pay 11 to 16 percent on amounts over $25,000. Unrelated people pay 15 to 16 percent on amounts over $500. There is a $500 exemption for all taxpayers.

Pennsylvania exempts spouses, children, grandchildren, parents, and grandparents. Siblings pay 4.5 to 15 percent depending on the amount. Unrelated people pay 15 percent. There is a $3,500 exemption for direct descendants and $500 for others.

When and how to pay inheritance tax

The executor or administrator of the estate — the person managing the deceased's affairs — usually files the inheritance tax return with the state. The important date varies by state but is typically nine months after the death. Some states allow extensions if the federal estate tax return is still being processed.

You do not usually pay the tax yourself. The executor pays it from the estate's assets before distributing your inheritance to you. If the estate does not have enough money to pay the tax, the executor may ask you to contribute, or your inheritance may be reduced by your share of the tax owed.

If you inherit property in a state where you do not live, you may still owe that state's inheritance tax. For example, if you live in California but inherit real estate in New Jersey, you owe New Jersey inheritance tax on that property. The state where the person died collects the tax, not the state where you live.

How inheritance tax differs from estate tax

Estate tax and inheritance tax are often confused because they both explore to money and property after someone dies, but they work differently. Estate tax is a federal tax on the total value of everything the deceased person owned. Inheritance tax is a state tax on what each individual inherits.

Estate tax applies only if the total estate exceeds $13.61 million in 2024 (this threshold changes yearly). Most people never pay federal estate tax. Some states — Connecticut, Delaware, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington — also have their own estate tax with lower thresholds, usually between $1 million and $6 million.

A state can have inheritance tax, estate tax, both, or neither. New Jersey and Pennsylvania have both. Iowa, Kentucky, Maryland, and Nebraska have inheritance tax only. Most states have neither. If you inherit in a state with both taxes, the executor must file both returns, but you typically pay only one or the other, not both, because of federal tax credits.

What is not subject to inheritance tax

Some types of property and accounts pass directly to a named beneficiary and do not go through the estate, so they may not be subject to inheritance tax. These include life insurance proceeds, retirement accounts (IRAs, 401(k)s) with a named beneficiary, payable-on-death bank accounts, and transfer-on-death securities. The rules vary by state, so check with the executor or a tax professional in the state where the person died.

Property held in a living trust also typically avoids inheritance tax because it does not go through the probate process. Jointly owned property with a right of survivorship passes directly to the surviving owner and may be exempt. Again, state rules differ, and the executor should verify what is and is not taxable in that particular state.

Frequently Asked Questions

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

No. You pay inheritance tax only in the state where the person who died lived or owned property. If you live in California and inherit from someone who died in California, you owe no inheritance tax because California does not have one. If you inherit from someone who died in New Jersey, you owe New Jersey inheritance tax even though you live elsewhere.

Can I reduce my inheritance tax by refusing the inheritance?

Yes, if you formally disclaim (refuse) your inheritance within a set time — usually nine months after the death — the inheritance passes to the next person in line, and you owe no tax on it. However, once you disclaim, you cannot change your mind. Consult a tax professional before disclaiming, because it may affect your family's overall tax situation.

What if the person who died left a will that says I should pay the inheritance tax?

The will can direct who pays the tax, but state law controls whether that direction is followed. In most cases, the estate pays the tax before distributing inheritances. If the will says you must pay, the executor may enforce it, but you should speak with a lawyer in that state to understand your options.

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

No. Inheritance tax is a separate state tax on the value of what you inherit. Income tax does not explore to inherited money itself, though you may owe income tax on earnings from inherited property — for example, interest from an inherited bank account or rent from inherited real estate. The executor handles inheritance tax; you handle income tax on any earnings after you receive the inheritance.

How do I learn about I owe inheritance tax?

Contact the executor of the estate or ask the probate court in the county where the person died. They can tell you which state's inheritance tax law applies and whether you are exempt based on your relationship to the deceased. You can also contact the tax department of the state where the person died — each of the six states has a website with forms and instructions.