Federal inheritance tax does not exist, but the federal estate tax applies to very large inheritances

The confusion starts here: there is no federal inheritance tax in the United States. What exists instead is a federal estate tax, which is paid by the estate itself before money reaches heirs—not by the people who inherit. For 2024, the federal estate tax only applies to estates worth more than $13.61 million. That threshold changes yearly and is scheduled to drop to roughly $7 million per person in 2026 unless Congress acts.

Most people never encounter the federal estate tax because their estates fall below the threshold. If you inherit money or property, you typically owe no federal tax on it. The person who died may have owed estate tax, but that was their estate's responsibility, not yours.

Some states, however, have their own inheritance or estate taxes that kick in at much lower amounts. This is where the real variation happens, and where you need to know your own state's rules.

Key Takeaways

  • Federal estate tax only applies to estates larger than $13.61 million in 2024, and most inheritances are not taxed at the federal level.
  • Six states have inheritance taxes that explore to money you receive from a will or trust, with thresholds ranging from $500 to $5.25 million depending on your relationship to the deceased.
  • Twelve states have estate taxes separate from inheritance taxes, with thresholds between $1 million and $5.93 million.
  • Your state of residence, not the state where the deceased lived, usually determines whether you owe inheritance tax on what you receive.
  • Real estate, retirement accounts, and life insurance proceeds follow different tax rules than money left in a will.

Which six states have inheritance taxes and what they charge

Only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes. These taxes are paid by the person who inherits, not by the estate. The amount you owe depends on your relationship to the person who died and the size of what you receive.

In most of these states, spouses and children pay nothing or a reduced rate. More distant relatives and unrelated people pay higher rates. For example, in Pennsylvania, a spouse inherits tax-free, a child pays 4.5 percent, and an unrelated person pays 15 percent. In Iowa, a spouse or child pays nothing, but a grandchild pays 5 percent and an unrelated person pays 15 percent. The thresholds—the amount you can inherit before owing anything—range from $500 in Kentucky to $5.25 million in New Jersey, again depending on your relationship to the deceased.

If you live in one of these six states and inherit money or property, you will receive a notice from the state tax authority. The executor of the estate (the person managing it) usually handles the filing, but you may need to provide information about what you received.

Twelve states with estate taxes instead of inheritance taxes

Estate taxes work differently: they are paid by the estate before distribution to heirs, not by the heirs themselves. Twelve states have estate taxes: Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Maryland has both an estate tax and an inheritance tax, making it unique.

Estate tax thresholds vary widely. Connecticut, Delaware, and Maine allow estates up to $5.93 million tax-free. Illinois allows $4 million. New York allows $6.94 million. Washington allows $2.193 million. These thresholds also change yearly, usually rising with inflation.

Because the estate pays this tax before distributing money to heirs, you as an inheritor do not file a separate tax return for it. However, if the estate is large enough to owe tax, the executor will need to file a state estate tax return and may need to reduce what each heir receives to cover the tax bill.

How the federal estate tax threshold works and when it changes

The federal estate tax threshold is not fixed. Congress set it at $13.61 million per person for 2024, and it rises each year with inflation. In 2025, it is $13.99 million. However, this high threshold is temporary. Unless Congress passes new legislation, the threshold is scheduled to drop to approximately $7 million per person on January 1, 2026.

This means that if someone dies in 2025 with an $8 million estate, no federal estate tax is owed. If someone dies in 2026 with the same $8 million estate and Congress has not changed the law, the estate would owe federal tax on the $1 million above the threshold. The executor of the estate files the federal estate tax return (Form 706) if the estate exceeds the threshold.

Married couples can combine their thresholds, so a married couple could have an estate of roughly $27.98 million in 2025 before owing federal tax—if they plan correctly. This is why people with large estates often work with an estate attorney or tax professional to structure their affairs.

Retirement accounts and life insurance are taxed differently

Money in a 401(k), IRA, or other retirement account does not go through the estate. Instead, it passes directly to the named beneficiary. You do not owe inheritance or estate tax on it, but you may owe income tax when you withdraw it, depending on the account type and your relationship to the deceased.

Life insurance proceeds also pass directly to the named beneficiary and are generally not subject to income tax. However, if the deceased's estate is named as the beneficiary, the proceeds become part of the taxable estate and may trigger federal estate tax if the estate is large enough.

Real property (land and buildings) left in a will is subject to inheritance or estate tax in states that have those taxes. However, you receive a "step-up in basis," which means the property's value is reset to its fair market value on the date of death. If you sell it soon after inheriting, you typically owe no capital gains tax on the increase in value that happened before you inherited it.

Your state of residence determines your inheritance tax obligation

If you live in a state with an inheritance tax and inherit money from someone who lived in another state, you still owe the tax. Your state of residence is what matters, not where the deceased lived or where the property is located.

For example, if you live in Pennsylvania and inherit $100,000 from a relative who lived in Florida, you owe Pennsylvania inheritance tax on that $100,000. Florida has no inheritance tax, but Pennsylvania does, and you are the one receiving the money.

The one exception is real estate. If you inherit real property in a state with an inheritance or estate tax, that state may tax the property even if you live elsewhere. This is why the executor needs to know where all property is located.

What happens if you do not pay inheritance tax

If you owe inheritance tax and do not pay, the state tax authority will send notices and may place a lien on property you inherited. Interest and penalties accumulate quickly. In most cases, the executor of the estate is responsible for filing the return and paying the tax before distributing money to heirs, so the burden does not fall on you alone.

If the executor does not file or pay, heirs can be held liable. This is why it is important to ask the executor whether inheritance or estate taxes are owed in your state before accepting your inheritance. If the estate is large or the situation is complicated, the executor should work with a tax professional or attorney.

Frequently Asked Questions

Do I owe federal tax on money I inherit?

No, unless the estate itself is larger than $13.99 million in 2025 (or roughly $7 million starting in 2026). The estate pays federal tax before distributing to heirs. You receive your inheritance tax-free at the federal level in almost all cases.

What if I inherit property in a state where I do not live?

Your state of residence determines whether you owe inheritance tax on cash or personal property. Real estate is taxed by the state where it is located. If you inherit a house in New Jersey but live in Pennsylvania, both states may have a claim, depending on their laws.

Do I have to report inherited money to the IRS?

Inherited money itself is not reported to the IRS as income. However, if the inherited money earns interest or dividends after you receive it, that income is taxable. Retirement accounts have special rules and may require you to take distributions.

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

That is an estate planning question that depends on your state and the size of your estate. An estate attorney can explain strategies like trusts and gifts. This is beyond what a tax guide covers, but it is worth discussing with a professional if your estate is substantial.

Who pays the inheritance tax—me or the estate?

In states with inheritance taxes, you pay the tax on what you receive. In states with estate taxes, the estate pays before distributing to heirs. The executor usually handles filing in both cases, but the burden falls on different parties depending on your state's law.