Inheritance tax is paid by the person who receives the money or property, not by the estate itself

The timing and amount you owe depends on which state you live in and what you inherit. Only six states currently have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The federal government does not tax inheritances at all — that is a common misunderstanding. If you live outside those six states, you owe nothing to any government body on what you inherit.

If you do live in one of those states, you typically pay the tax when you file your state income tax return for the year you received the inheritance. The important date is usually April 15 of the following year, the same as your regular income tax. Some states allow you to pay in installments if the amount is large, but you must request that arrangement before the important date passes.

The tax rate and what is taxed varies sharply by state and by your relationship to the person who died. A spouse or child often pays nothing, while a distant relative or unrelated person may pay 15 percent or more. The value of the inheritance also matters — most states have a threshold below which nothing is owed, and that threshold is higher for close relatives.

Key Takeaways

  • Only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes; the federal government does not.
  • You pay inheritance tax when you file your state income tax return in the year after you receive the inheritance, usually by April 15.
  • Spouses and children often owe nothing, while distant relatives or unrelated people may owe 15 percent or more of what they inherit.
  • Each state sets its own tax rate and threshold, so the amount you owe depends entirely on where you live and your relationship to the person who died.

How inheritance tax differs by state and relationship

Iowa taxes all inheritances except those to spouses, children, and grandchildren. The rate ranges from 1 percent to 15 percent depending on how distant the relationship is. A sibling pays 10 percent on amounts over $25,000. A niece or nephew pays 13 percent. An unrelated person pays 15 percent on everything over $500.

Kentucky exempts spouses and lineal descendants (children and grandchildren) but taxes siblings, aunts, uncles, and cousins at 4 percent to 16 percent. Maryland taxes all heirs except spouses and lineal descendants at 10 percent. Nebraska and Pennsylvania have similar structures — close relatives pay nothing, distant ones pay between 11 and 18 percent.

New Jersey is the most complex. It taxes all heirs except spouses, children, grandchildren, parents, and grandparents. The rate is 11 percent to 16 percent, but the threshold is $25,000 — you owe tax only on amounts above that. A sibling in New Jersey pays 11 percent on inheritance over $25,000.

If you inherit from someone who lived in a different state than you do, you owe tax in the state where you live, not where the person died. If you live in a state with no inheritance tax, you owe nothing, even if the person who died lived in one of the six states that has one.

What counts as inheritance and what does not

Cash, real estate, vehicles, stocks, and personal property all count toward the inheritance tax. The value is usually the fair market value on the date of death, not what the person paid for it years earlier. If you inherit a house worth $300,000, that full amount counts toward your tax threshold in states that tax it.

Life insurance payable to you does not count as inheritance in most states — it passes directly to you outside the estate. The same is true for retirement accounts like IRAs and 401(k)s if you are named as the beneficiary. Bank accounts with a "payable on death" designation also pass directly to you and are not subject to inheritance tax.

Gifts the person gave you while alive do not count as inheritance. Only property that passes to you through the will or by law (because there is no will) is taxed. Some states also exempt certain property like a family home or farm if it stays in the family.

When the estate pays tax versus when you pay it

In most cases, you as the heir pay the inheritance tax, not the estate. The estate may have to pay a separate federal estate tax if it is very large (over $13.61 million in 2024), but that is rare and is a different tax entirely. The executor of the estate usually does not withhold inheritance tax from your share — you are responsible for paying it yourself when you file your return.

Some states allow the executor to pay the inheritance tax on behalf of the heirs, but this is optional and depends on the state and the will. If the executor does pay it, the amount comes out of the estate before your share is distributed. If the executor does not pay it, you must pay it yourself by the tax important date.

If you do not pay by the important date, the state can charge interest and penalties. The interest rate varies by state but is typically 5 percent to 10 percent per year. Penalties can add another 5 percent to 25 percent of the unpaid tax. If you cannot pay in full, contact the state tax department to ask about a payment plan before the important date.

How to report inheritance on your tax return

You report inheritance tax on your state income tax return, not your federal return. The form varies by state. In Iowa, you file Form IA 706. In Kentucky, you file Form 706-KY. In Maryland, you file Form 502. Each state has its own form and its own instructions.

You will need the date of death, the fair market value of what you inherited, your relationship to the person who died, and proof of your residency in the state. The executor of the estate usually provides a document showing what each heir received and its value. Keep this document with your tax records.

If you are unsure whether you owe tax, contact the state tax department directly. Most states have a phone line and a website where you can ask questions. You can also work with a tax preparer or accountant who knows your state's rules. The cost of professional help is often less than the penalty for filing late or incorrectly.

What happens if you inherit property in multiple states

If you inherit real estate in a state other than where you live, you may owe inheritance tax in both states. You live in the state where you pay income tax, and you owe that state's inheritance tax on everything you inherit. If the real estate is in a state with an inheritance tax, you may also owe that state's tax on the property itself.

However, most states allow a credit for taxes paid to another state, so you do not pay twice on the same property. If you inherit a house in Pennsylvania and you live in New Jersey, you would calculate the tax in both states and pay the higher amount, then claim a credit in the other state. The rules for this credit vary, so ask a tax professional if you inherit property in multiple states.

If you inherit property in a state with no inheritance tax, you owe tax only in your home state, if it has one. The location of the property does not matter if the state where it sits does not tax inheritance.

Frequently Asked Questions

Do I owe federal inheritance tax on what I inherit?

No. The federal government does not tax inheritances. Only six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If you live outside those states, you owe nothing to any government body on what you inherit.

What if the person who died lived in a state with inheritance tax but I live in a state without one?

You owe tax in the state where you live, not where the person died. If you live in a state with no inheritance tax, you owe nothing, even if the person who died lived in Iowa or Pennsylvania. Your residency determines which state's tax rules explore.

Do I have to pay inheritance tax on a life insurance payout?

No. Life insurance paid directly to you as the named beneficiary is not subject to inheritance tax in any state. The same is true for retirement accounts like IRAs and 401(k)s if you are named as the beneficiary. These pass outside the estate and are not taxed as inheritance.

Can I pay inheritance tax in installments if I cannot pay all at once?

Some states allow installment payments if you request them before the tax important date. Contact your state tax department to ask about a payment plan. If you do not arrange a plan before the important date, the state will charge interest and penalties on the unpaid balance.

What if the executor already paid the inheritance tax from the estate?

Then the amount comes out of the estate before your share is distributed, and you do not owe anything additional. The executor should provide you with documentation showing what was paid. Keep this with your tax records in case the state asks questions later.