Inheritance Tax: What It Is, Who Pays and State-Specific Rules

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When someone dies, states might impose an inheritance tax on money or other assets transferred from the deceased person’s estate to the heirs or surviving family members. But most states do not impose an inheritance tax — and the states that do may offer exemptions to help you avoid paying inheritance taxes. Read on to learn more.

Read Next: What To Do If You Owe Back Taxes to the IRS

What Is Inheritance Tax?

An inheritance tax is a state tax that is levied on inherited money or property and is paid by the beneficiaries. There are very few states that currently have an inheritance tax, and there are also some exemptions that allow close relatives to avoid paying any inheritance tax at all. 

There are currently only six states that charge an inheritance tax, and the deceased usually has to have property or be a current resident for the state to levy the tax on beneficiaries. The amount of tax charged for an inheritance tax depends on the amount of the inheritance and the beneficiary’s relation to the deceased.

Inheritance Tax vs. Estate Tax

Estate taxes are charged to an estate that surpassed the lifetime gift and estate tax exemption. This is a federal tax, but some states may also charge an estate tax as well. But while estate taxes charge the estate itself, inheritance tax charges the beneficiaries.

Inheritance tax is not a federal tax, but there are a few states that impose a tax on inherited assets in certain circumstances. In some circumstances, an estate may have to pay estates taxes, and beneficiaries may owe an inheritance tax on the same funds.

Who Has To Pay Inheritance Tax?

In general, the beneficiaries of an inheritance have to pay for the inheritance tax. The amount owed depends on the beneficiary’s relationship to the deceased — and how much the inheritance is worth.

In most states with an inheritance tax, spouses and immediate family of the deceased are exempt from inheritance tax. But distant relatives and other beneficiaries may have to pay a higher inheritance tax rate. And bequests to certain non-profit organizations may have lower inheritance tax rates–or be completely exempt.

Here’s what you need to know about who pays for inheritance taxes:

• Tax beneficiaries pay an inheritance tax when they inherit assets such as money or property from someone who has died. This only applies when a deceased person’s lived or owned property in a state with an inheritance tax.
• Surviving spouses are always exempt.
• Though the U.S. does not have a federal inheritance tax, six states have inheritance taxes including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. 
• State inheritance taxes range between 1% and 16% depending on the state and based on the size of the inheritance.
• This type of tax differs from standard income taxes, gift taxes, estate taxes or federal estate taxes. Estate taxes are taken out of the estate itself.
• Typically, you need to file your tax return with an inheritance tax within nine to 18 months of receiving it.

What States Have Inheritance Tax?

State inheritance tax varies by state, as well as the relationship to the deceased. There are currently only six states that impose this specific tax, with one of them dropping the tax starting in 2025:

1. Nebraska
2. Iowa — the state’s inheritance tax will phase out completely in 2025
3. Kentucky
4. Pennsylvania
5. New Jersey
6. Maryland — imposes both an estate tax and an inheritance tax. But the estate tax is a credit against the inheritance tax, so only the larger is imposed

Inheritance Tax Rates

Inheritance taxes are levied on the beneficiaries of an inheritance. The tax rate typically ranges from 1% to 16%, depending on the state and relationship to the deceased. Some states offer an exemption on inheritance taxes up to a certain amount.

Here are the inheritance tax rates for each state that imposes one:

1. Nebraska

• Surviving spouses: No inheritance tax rate
• Siblings, parents, children and grandchildren: No taxes on amounts up to $100,000, then 1%
• Remote relatives (aunts, uncles, nieces, nephews): No taxes on amounts up to $40,000, then 11%
• Others: 15% on amounts above $25,000

2. New Jersey

• Lineal descendants: No inheritance tax
• Beneficiaries including siblings and civil union partners: No taxes on the first $25,000, then 11% to 16%
• Educational institutions and non-profits: No taxes
• All others: 15% tax on first $700,000, 16% on all amounts over $700,000

3. Maryland

• Lineal descendants, including children, spouses, parents or grandparents: No inheritance tax
• All others: Flat 10%

4. Kentucky

• Class A beneficiaries, including spouses, siblings, half-siblings and children: No inheritance tax up to $20,000, then 2% to 10%
• Class B beneficiaries, including aunts, uncles, great-grandchildren, children-in-law, nieces and nephews: No inheritance tax up to $10,000, then 4% to 16%
• Class C beneficiaries, which includes all others: No inheritance tax up to $10,000, then 6% to 16%

5. Pennsylvania

• Surviving spouse, assets passing to a parent from a child 21 or younger: No inheritance tax
• Charitable organizations, exempt institutions and government entities: No inheritance tax
• Direct descendants and lineal heirs: 4.5%
• Siblings: 12%
• All other heirs: Flat rate of 15%

6. Iowa

• Lineal descendants and ascendants: No inheritance tax
• Siblings, son-in-law, daughter-in-law: 1% up to $12,500, then 2% (plus additional flat rate)
• All other individuals: 2% up to $50,000, then 2.40% to 3% (plus additional flat rate)
• For-profit organizations: 3%
• Charitable or educational organizations: Amounts over $500 are taxed at a 2% rate
• Unknown heirs (can’t identify): 1%
• Certain tax-exempt charitable, religious, educational, or other organization: No inheritance tax

Iowa will no longer have an inheritance tax for the 2025 tax year.

Exemptions and Thresholds

There are exemptions in each state that allow for a certain amount of tax-exempt inheritance to different individuals and entities. These amounts vary based on the amount, relationship to the deceased, and tax status.

In most cases, spouses and immediate family aren’t subject to an inheritance tax, but not always. And extended family members usually get more favorable treatment than non-family beneficiaries. Each state treats inheritance tax differently, so you’ll need to review your state laws to know how much tax you may owe.

The Bottom Line

Most states don’t have an inheritance tax, but there are still six states that do. If you live in a state where you do have to pay tax on inheritance, here are a few tips to avoid, or at least lessen the tax bill for you or your loved ones:

• Consider giving your assets away when you are estate planning before you die.
• Double-check your state’s gift limit allowances and give an inheritance away in installments under the limit each year to avoid both inheritance and gift taxes. 
• Other things that help alleviate the tax burden of inheritance include living trusts, irrevocable trusts and grantor retained annuity trusts.

Caitlyn Moorhead contributed to the reporting of this article.

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