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

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Inheritance tax is a tax some states impose on the people who receive assets from a deceased person’s estate. Unlike estate tax, which is paid by the estate before assets are distributed, inheritance tax is typically paid by the beneficiary based on what they inherit and their relationship to the deceased.

Whether you owe inheritance tax depends on where the deceased lived, the value of the assets you receive and your relationship to the person who passed away. Many close relatives are fully or partially exempt, while distant relatives and non-family beneficiaries are more likely to owe taxes. Understanding how inheritance tax works can help you estimate potential costs, avoid surprises and plan more effectively when managing an inheritance.

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 Inheritance Tax Applies and Why Location Matters

Inheritance tax is not a federal tax — it’s only charged at the state level. Currently, just five states impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

This means whether you owe inheritance tax usually depends on where the deceased person lived at the time of their death, not where you live as the beneficiary.

State rules also vary, but most follow a similar structure:

• Surviving spouses are typically fully exempt
• Immediate family members often receive favorable rates or exemptions
• Distant relatives and non-family heirs usually face higher tax rates

In other words, your tax liability is shaped by two key factors: the state governing the estate and your relationship to the person you inherited from. A child or spouse may owe little to nothing, while a more distant beneficiary could owe significantly more on the same inheritance.

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 usually comes down to planning ahead and using the right legal and financial strategies to reduce the tax burden on your heirs.

Here are some common approaches to consider:

• Gifting assets during your lifetime. Transferring assets before death can reduce the overall size of your estate, which may lower or even eliminate inheritance taxes in some cases.
• Using the annual gift tax exclusion. You can give up to the annual exclusion amount each year, tax-free, without triggering federal gift tax reporting in most situations.
• Establishing trusts. Certain trusts, such as irrevocable trusts, can help move assets out of your taxable estate while also protecting and controlling how those assets are distributed.
• Making charitable donations. Giving to qualified charities can reduce the taxable value of your estate while supporting causes that matter to you.
• Working with an estate planning professional. An estate planning attorney or tax advisor can help you structure gifts, trusts and other strategies correctly to stay compliant and maximize tax efficiency.

The earlier you plan, the more flexibility you typically have to reduce taxes and preserve wealth for your beneficiaries.

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.

Is There a Way to Avoid Inheritance Tax Altogether?

In some cases, you may be able to reduce — or even avoid — inheritance taxes with proactive estate planning. The key is using legal strategies that lower the taxable value of your estate before assets are transferred to heirs.

Here are a few options to discuss with a financial or estate planning professional:

• Gifting assets during your lifetime. Giving assets while you’re alive can shrink your estate’s value, which may reduce or eliminate inheritance tax exposure.
• Using the annual gift tax exclusion. You can transfer a set amount each year to individuals tax-free, helping move wealth out of your estate gradually.
• Setting up trusts. Tools like irrevocable trusts can help shield assets from inheritance taxes while also providing control and protection over how they’re distributed.
• Making charitable contributions. Donations to qualified charities can lower the taxable value of your estate and support causes you care about.
• Working with an estate planning professional. An attorney or tax advisor can help structure your plan correctly, ensure compliance and identify the most tax-efficient strategies for your situation.

Planning ahead is essential. The earlier you put a strategy in place, the more flexibility you have to reduce taxes, avoid complications and preserve more wealth for your beneficiaries.

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