What Is Inheritance Tax? A Guide to Costs and Who’s Responsible

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When someone passes away, and leaves their belongings to others, an inheritance tax may apply. In a nutshell, inheritance tax is typically paid by the heirs or beneficiaries who receive the assets, as it is a tax on the inheritance they receive rather than the estate itself. Whereas, as with estate tax, the responsibility for payment generally falls on the estate itself rather than the heirs.

However, there’s a little more to the story, so keep reading to learn more about these taxes and how they work.

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What Is Inheritance Tax and How Does It Work?

Inheritance tax is a tax on the value of someone’s property, money and belongings after they pass away before it is given to their heirs or beneficiaries. The amount of tax and the rules for when it applies can change depending on the country or region.

Some tax jurisdictions may not charge this tax on smaller estates or specific property types. Usually, the person in charge of handling the estate, called the executor, is responsible for figuring out the tax and making sure it is paid.

Where You Live Matters

“Only five states have an inheritance tax — Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. The specifics of the inheritance tax vary by state, but all the states with an inheritance tax-exempt the surviving spouse from the inheritance tax and provide an exemption amount for different groups,” says John Accursio of Abrams Garfinkel Margolis Bergson, LLP.

In other words, the amount of inheritance tax you’ll pay depends on where the deceased lived at the time of their death and your relationship with the deceased. For instance, a close relative, like an immediate family member, will likely pay less taxes on inherited assets than a distant relative.

How Are You Taxed When You Inherit Money?

You only have to pay inheritance tax if you live in a state that requires it. The tax rates in these states range from 0% to 16% on assets with a value greater than the statutory threshold. These rates can fluctuate depending on the heir’s relationship to the deceased person.

For example, as of 2024, Nebraska levies a 1% tax on inherited assets over $100,000 for immediate family members. The rate is 11% for assets valued over $40,000 left to remote family and 15% for assets worth more than $25,000 left to anyone else. Pennsylvania does not tax the inheritance of spouses and children under the age of 21.

Inheritance Tax vs. Estate Tax

These examples apply to inheritance tax, which is a state tax on the money someone inherits. The federal government does not charge an inheritance tax, but it does have an estate tax. Unlike an inheritance tax — which the heirs pay out of their inheritance, the deceased person’s estate pays the estate tax.

Calculating Estate Tax

To calculate the estate tax, the executor adds up the fair market value of all assets in the estate. This includes cash, property, insurance, investments, businesses and tax refunds. After subtracting the value of debts, expenses related to administering the estate and other deductions, the remaining amount may be subject to the estate tax.

In 2024, the threshold is $13,610,000, and in 2025, it will be $13,990,000. Few estates meet the requirements for the estate tax.

How Common Is the Estate Tax?

In 2018, less than 1% of estates were taxed — and most of them belonged to people in the highest federal tax brackets, thanks to these exemptions passed by Congress.

According to an IRS report, “The number of estate tax returns filed increased 32%, from 6,158 in 2021 to 8,130 in 2022, primarily due to large decreases followed by subsequent sharp increases in asset prices in response to the pandemic.”

Do States Also Have an Estate Tax?

Some states also have an estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington.

State estate tax rates range from 0.8% to 20%, levied on the value of the estate after subtracting the exempted amount –similar to the way common tax deductions lower your taxable income on your annual tax return.

How Is Inheritance Tax Calculated?

Inheritance tax is typically calculated by the fair market value (the price a buyer is willing to pay and seller is willing to accept) of their inherited assets. States then have different exemptions, deductions and tax rates that can impact how much a beneficiary pays,” says Howard Enders of the Estate Registry. For example, spouses and sometimes even children may be entirely exempt from paying the tax.

State-by-state variations can significantly affect how much inheritance tax is paid. However, some states don’t levy inheritance taxes at all, like Florida and Texas.

How to Minimize Inheritance Tax on Inherited Property

Minimizing inheritance tax requires advance planning and knowledge of tax and legal strategies that can reduce the tax burden on heirs. Here are some approaches to consider:

• Gifting assets during the decedent’s lifetime can reduce the estate’s value and lower or eliminate inheritance taxes.
• Annual gift tax exclusions allow for tax-free transfers up to a certain amount each year.
• Setting up trusts, such as irrevocable trusts, helps shield assets from inheritance taxes and protects them.
• Charitable giving to qualifying organizations can benefit causes and reduce taxable estate value through deductions.
• Consulting an estate planning attorney or tax professional ensures compliance, personalized advice, and effective tax minimization.

Is Inherited Property Considered Taxable Income?

Inherited property may be taxable when you sell it for more than it was worth when you inherited it. For example, imagine someone leaving you a classic car with a fair market value of $10,000 on the day that person died. If you don’t need or want the car and sell it for $20,000, you have a capital gain of $10,000. You may owe capital gains tax on the difference.

Inheriting cash or similar assets works in a similar manner. “Financial accounts will usually grow through interest, dividends, capital gains, etc., and the income generated is the responsibility of the recipient. Similarly, when inherited property is subsequently sold, capital gains may be owed on the gain,” says David T. DuFault, attorney at Sodoma Law.

Common Myths About Inheritance Tax You Should Know

• Myth: Inheritance tax applies to all estates — False; many estates fall below the taxable threshold.
• Myth: Only the wealthy benefit from estate planning — False; proper planning helps individuals of all financial levels.
• Myth: Trusts are only for tax evasion — False; they provide asset protection and ensure proper distribution.
• Myth: Avoiding inheritance tax is illegal — False; there are many legal ways to minimize tax burdens.

Is There a Way to Avoid Inheritance Tax Altogether?

Here are some strategies to discuss with a financial professional if you are concerned about reducing inheritance taxes.

• Gifting assets during the your lifetime can reduce your estate’s value and lower or eliminate inheritance taxes.
• Annual gift tax exclusions allow for tax-free transfers up to a certain amount each year.
• Setting up trusts, such as irrevocable trusts, helps shield assets from inheritance taxes and protects them.
• Charitable giving to qualifying organizations can benefit causes and reduce taxable estate value through deductions.
• Consulting an estate planning attorney or tax professional ensures compliance, personalized advice and effective tax minimization.
• Advance planning preserves more inheritance for beneficiaries and prevents unnecessary complications.

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