What Inheritance Tax Is

Inheritance tax is a tax on money or property you receive from someone who has died. The tax is owed by the person who inherits — that is, you — not by the estate itself. The amount you owe depends on your relationship to the person who died, the value of what you received, and which state you live in. Not all inheritances are taxed, and many people who inherit pay nothing.

The key difference from estate tax is who pays: an estate tax is paid by the dead person's estate before money goes to heirs, while an inheritance tax is paid by each heir on what they personally receive. Only a handful of states have inheritance taxes at all, and the federal government does not.

Key Takeaways

  • Only six states currently have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
  • Close relatives like spouses and children are often exempt from inheritance tax, even in states that have it.
  • The tax rate and the amount you can inherit tax-free varies by state and by your relationship to the person who died.
  • You report inheritance tax on your state income tax return, not on a separate federal form.

Which States Have Inheritance Tax

Only six states tax inheritances: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If you live in any other state, you owe no state inheritance tax on what you receive, regardless of the amount.

If you live in one of these six states but the person who died lived elsewhere, you may still owe tax on what you inherited — the tax is based on where you live, not where the deceased lived. The reverse is also true: if you live outside these states but the person who died lived in one of them, you typically do not owe that state's inheritance tax.

Who Is Exempt From Inheritance Tax

In every state that has an inheritance tax, spouses are completely exempt — you pay nothing on an inheritance from your spouse. Children and grandchildren are also exempt in most of these states, though the rules vary slightly. In some states, parents and siblings are taxed at a lower rate than more distant relatives.

The exact exemptions depend on your state. For example, in Pennsylvania, spouses, children, and grandchildren pay no tax, but siblings pay 15 percent on amounts over $3,500. In New Jersey, spouses and children are exempt, but aunts, uncles, and cousins pay 11 to 16 percent depending on the amount. Check your state's tax department website to see which relatives are exempt where you live.

How Much You Owe and How to Calculate It

The amount of inheritance tax you owe depends on three things: which state has the tax, your relationship to the person who died, and the total value of what you inherited. Each state sets its own tax rates and thresholds — the point at which you start owing tax.

For example, in Iowa, a child inherits the first $25,000 tax-free, then pays 1 to 6 percent on amounts above that. In Maryland, there is no threshold for spouses or children (they are exempt), but a sibling pays 10 percent on the full amount. In Nebraska, a grandchild pays 1 to 18 percent depending on the amount, with no exemption. Because the rules are so different, you need to look up your specific state and your relationship to the deceased.

The value you are taxed on is the fair market value of what you received on the date the person died, not what you sell it for later. If you inherited a house worth $300,000 on the date of death, that is the value used to calculate tax, even if you sell it for $350,000 a year later.

When and How to Pay Inheritance Tax

In most states, you report inheritance tax on your state income tax return for the year you received the inheritance. You do not file a separate federal form — the federal government does not tax inheritances. Some states require the executor of the estate (the person managing the dead person's affairs) to file a separate inheritance tax return and pay the tax before distributing money to heirs, while others let you pay it yourself when you file your income taxes.

The important date to pay is usually the same as your state income tax important date, which is typically April 15 of the year after you received the inheritance. If you miss the important date, you owe penalties and interest. Contact your state's tax department or the executor of the estate to find out whether you need to file a separate return or report it on your income tax return.

Inheritance Tax Versus Estate Tax

Inheritance tax and estate tax are often confused because they both involve money after someone dies, but they work differently. Estate tax is paid by the dead person's estate — the total value of everything they owned — before any money goes to heirs. Inheritance tax is paid by each person who inherits, based on what they personally received.

The federal government has an estate tax, but it only applies to very large estates — $13.61 million or more in 2024, though this threshold changes each year. Most people's estates are not large enough to owe federal estate tax. Some states also have estate taxes in addition to or instead of inheritance taxes. If a state has both, the executor typically pays the estate tax first, and then heirs pay inheritance tax on what they receive.

What Inheritances Are Not Taxed

Not all money you receive after someone dies is subject to inheritance tax. Life insurance proceeds paid directly to you as the named beneficiary are not taxed as inheritance in any state. Money in a retirement account like an IRA or 401(k) that goes to a named beneficiary is also not subject to inheritance tax, though you may owe income tax on it when you withdraw it.

Property that passes to you through a living trust, a payable-on-death bank account, or a transfer-on-death deed also typically avoids inheritance tax because it does not go through the estate. These are reasons some people set up these arrangements — not to avoid taxes entirely, but to control who gets what and sometimes to reduce the tax burden on heirs.

Frequently Asked Questions

Do I owe federal inheritance tax?

No. The federal government does not tax inheritances. Only six states have inheritance taxes. If you live outside those states, you owe no state inheritance tax either, regardless of how much you inherited.

What if I inherited money from someone who lived in a different state?

The tax is based on where you live, not where the person who died lived. If you live in a state with an inheritance tax, you may owe tax on what you inherited. If you live outside those six states, you do not owe state inheritance tax.

Do I have to pay inheritance tax on a house I inherited?

It depends on which state you live in and your relationship to the person who died. If you live in one of the six states with inheritance tax and you are not exempt (for example, you are a sibling rather than a child), you owe tax on the fair market value of the house on the date of death. Spouses and children are exempt in most of these states.

Can I deduct inheritance tax on my income tax return?

No. Inheritance tax is not deductible on your federal income tax return. Some states allow you to deduct it on your state return, but most do not. Check your state's tax rules to be sure.

What happens if I do not pay inheritance tax?

If you owe inheritance tax and do not pay by the important date, you will owe penalties and interest on top of the original amount. The executor of the estate or your state's tax department can pursue collection. It is better to pay on time or contact your state's tax department if you cannot pay the full amount at once.