An inheritance tax is a levy imposed by some states on the recipients of inherited assets. Unlike estate tax, which the deceased’s estate pays, inheritance tax is borne by the recipient of the bequest.
Currently, only six U.S. states impose an inheritance tax. The specifics of the tax—such as the rates and exemptions—vary depending on the state, the value of the inheritance, and the beneficiary’s relationship to the deceased.
Key Takeaways
- Inheritance tax is imposed on the assets inherited from a deceased person and is paid by the beneficiary.
- No federal inheritance tax exists in the U.S.
- Only six states— Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—impose an inheritance tax.
- Your inheritance tax obligations depend on the inheritance value, your relationship to the deceased, and the rules in the decedent’s state.
Understanding Inheritance Taxes
The U.S. government does not impose a federal inheritance tax. The federal government collects estate taxes but leaves inheritance tax to individual states. Currently, only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania levy inheritance taxes.
When the Tax Applies
Whether inherited assets are taxed, and at what rate, depends on their value, the relationship between the beneficiary and the deceased, and the rules in the state where the decedent lived or owned property.
Inheritance taxes apply according to the state’s laws where the deceased resided—not where the beneficiary lives. Thus, inheritors in states without an inheritance tax are not subject to the tax even if they reside in states that impose it.
Generally, inheritance taxes kick in above certain value thresholds depending on the state and the beneficiary’s relationship with the decedent. Only about 2% of recipients typically owe any inheritance tax.
How Inheritance Taxes Are Calculated
Inheritance taxes are only assessed on the portion of the inheritance exceeding an exemption amount. Tax rates usually start in the single digits and can escalate to between 15% and 18%.
For example: if a state imposes an inheritance tax on bequests over $100,000 and you inherit $150,000, you might owe taxes on $50,000. With a tax rate of 10%, the tax calculation would be:
- $50,000 x 0.10 = $5,000
- Tax amount owed: $5,000
The exemption amount and tax rate often depend more significantly on your relationship to the deceased rather than the value of the inheritance. Surviving spouses are exempt from inheritance tax in all six states mentioned above.
Inheritance Tax Thresholds by State
Inheritance tax thresholds and rules vary by state. Here are some specific examples:
- Iowa: Estates valued under $25,000 are tax-exempt. Lineal relatives and charities up to $500 are also exempt. Tax rates on others range from 2% to 6%. Iowa will repeal its inheritance tax in 2025.
- Kentucky: Immediate family members are exempt while other recipients are exempt up to $500 or $1,000, with tax rates ranging from 4% to 16%.
- Maryland: Immediate family and charities are exempt. Other recipients are exempt up to $1,000, with a 10% tax rate.
- Nebraska: Spouses and charities are exempt. Immediate family (parents, grandparents, siblings, children, grandchildren) are exempt up to $100,000, with tax rates adjusted to 1%, 11%, and 15%.
- New Jersey: Immediate family and charitable organizations are exempt. Siblings and in-laws are exempt up to $25,000, with tax rates ranging from 11% to 16%.
- Pennsylvania: Only spouses and minor children are exempt. Tax rates for other beneficiaries start at 4.5%, progressing to 15%.
Estate Tax vs. Inheritance Tax
While often lumped together, estate tax and inheritance tax are distinct. Estate tax is levied on the deceased’s estate before the assets are distributed, while inheritance tax is levied on the recipient of the inherited assets.
Federal Estate Tax
As of 2024, federal estate tax returns are only required for estates exceeding $13.61 million. Smaller estates often do not owe this tax. No estate tax is assessed if the estate passes to the deceased person’s spouse.
State Estate Tax
Twelve states and the District of Columbia also collect estate taxes. These jurisdictions include Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
Avoiding Inheritance Tax
Residents seeking to reduce their heirs’ inheritance tax burdens can employ several strategies:
- Life Insurance: Purchasing a life insurance policy and naming the intended heir as the beneficiary can avoid inheritance taxes on the death benefit.
- Trusts: Placing assets in an irrevocable trust can remove them from the taxable estate. Always consult with an estate attorney to set up such trusts correctly.
Common Questions About Inheritance Tax
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How Much Can You Inherit Without Paying Taxes? Each state’s inheritance tax thresholds vary. Federal estate tax exemption as of 2024 is $13.61 million over a lifetime.
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What Is the Federal Inheritance Tax Rate? There is no federal inheritance tax. The federal estate tax applies to estates over $13.61 million.
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Do Beneficiaries Have To Pay Taxes on Inheritance? It depends on their relationship to the deceased and the state where the decedent lived or owned property. Spouses are exempt in all six states with inheritance taxes.
The Bottom Line
Inheritance taxes affect bequests in only six states and mostly apply to more distant relatives or unrelated heirs. Spouses and often immediate family members are typically exempt. However, inheritance tax can apply at relatively low inheritance amounts, drawing significant attention to tax planning. Utilizing a mix of estate planning strategies can help minimize the tax burden on heirs.
Related Terms: estate tax, inheritance tax threshold, beneficiary, tax exemption, irrevocable trust.
References
- Tax Policy Center. “How Do State Estate and Inheritance Taxes Work?”
- Internal Revenue Service. “Estate Tax”.
- Tax Foundation. “Does Your State Have an Estate or Inheritance Tax?”
- Tax Foundation. “Does Your State Have an Estate or Inheritance Tax?”
- TurboTax. “What Are Inheritance Taxes?”
- New Jersey Department of Treasury. “Inheritance Tax Beneficiary Classes”.
- New Jersey Department of Treasury. “Inheritance Tax Rates”.
- Platte Institute. “Death and Taxes: Nebraska’s Inheritance Tax”.
- Internal Revenue Service. “Instructions for Form 706 (Rev. September 2022)”, Page 27.
- Iowa Department of Revenue. “Iowa Inheritance Tax Rates: 2023”.
- Maryland Office of the Register of Wills. “Administration of Estates in Maryland”, Pages 1-2.
- Kentucky Department of Revenue. “A Guide to Kentucky Inheritance and Estate Taxes”, Page 6.
- Nebraska Legislature. “Nebraska Revised Statute 77-2003.”
- Center for Rural Affairs. “Nebraska Inheritance Tax 2022 Update”.
- Nebraska Legislature. “Nebraska Revised Statute 77-2004”.
- Nebraska Legislature. “Nebraska Revised Statute 77-2005.”
- Nebraska Legislature. “Nebraska Revised Statute. 77-2006.”
- Pennsylvania Department of Revenue. “Pennsylvania Inheritance Tax and Safe Deposit Boxes”.
- Connecticut Office of Legislative Research. “Estate, Inheritance, and Gift Taxes in CT and Other States”, Page 1.
- Internal Revenue Service. “26 CFR 601.602: Tax Forms and Instructions”.
- United States Code. “26 USC §2056”.
- JRC Insurance Group. “States With an Inheritance Tax”.
- Internal Revenue Service. “Instructions for Form 706”, Page 6.
