An inheritance is a gift that can come with feelings of grief and confusion — and for some, a tax burden.
The federal government doesn't tax the recipients of inheritances, but roughly 38 million Americans live in a state that does.
Here's how the inheritance tax works, including what types of property are included in the calculation and who can get out of paying it.
What is an inheritance tax?
When someone dies and their assets are given to another person, the recipient may be responsible for paying an inheritance tax to their state government.
"An inheritance tax is imposed directly on the person who inherits," says Tracy Craig, a partner at the Massachusetts law firm Seder & Chandler, and chair of the firm's Trusts and Estates Practice Group. "Typically, the closer familial relationship to the decedent, the lower the tax rate."
People can inherit a range of assets, from retirement accounts to real estate to jewelry collections, and the inheritance tax is calculated based on their value. Several states with an inheritance tax allow exemptions for life insurance proceeds.
States with inheritance tax
Only six states impose an inheritance tax on beneficiaries for 2024:
- Iowa: 2% to 6% (Note: Iowa will eliminate its inheritance tax on January 1, 2025.)
- Kentucky: 4% to 16%
- Maryland: 10%
- Nebraska: 1% to 15%
- New Jersey: 11% to 16%
- Pennsylvania: 4.5% to 15%
Who pays inheritance tax?
An inheritance tax is paid by the person who inherits property, while an estate tax is paid by the executor of an estate using money from the estate itself — and it's calculated before assets are divided among beneficiaries.
The estate tax basically amounts to a tax on the decedent's right to transfer property, as opposed to a tax on the privilege of receiving property.
If you live in a state that taxes inherited property, you may be able to deduct the tax you paid on your federal return, Craig says.
Here are the main differences between an estate tax and an inheritance tax:
| Estate tax | Inheritance tax |
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How inheritance tax is calculated
In the few states with an inheritance tax, an inheritance tax return typically needs to be filed to detail who received what assets and how much tax is owed, Craig says. States usually allow some of an inheritance to be exempt from taxes. In some cases, the entirety of an inheritance could be tax free.
For example, in New Jersey, inheritors are classified by their relationship to the decedent. Class A beneficiaries don't pay inheritance taxes. Class C beneficiaries — close family relatives, such as siblings, sons-in-law, and daughters-in-law — get an exemption on the first $25,000 in inherited assets. Amounts beyond $25,000 are taxed progressively, ranging from 11% to 16%.
Strategies to minimize inheritance tax
There are a few ways to avoid triggering an inheritance tax for your heirs, including gifting assets during your lifetime or placing property into a trust as part of a wider estate plan.
If you have substantial wealth to pass on, having your heir move to a state without an inheritance tax might be worth consideration, since the tax is based on where the recipient lives.
And leaving assets to close relatives, including spouses and children, generally avoids inheritance tax altogether.
FAQs on inheritance tax
How is inheritance tax different from estate tax?
An inheritance tax is a state tax on the privilege of receiving property after a person's death. An estate tax is a federal, and sometimes state, tax on a person's right to transfer property after their death.
Do I have to pay inheritance tax if I live in a state without it?
No, you won't have to pay inheritance tax if you live in a state without it.
How can I find out the inheritance tax laws in my state?
You can find out the inheritance tax laws in your state online. If you live in one of the few states that tax inheritance — Iowa (until 2025), Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania — visit the state's revenue department website for more information about tax rates and reporting requirements.
