Inheritance taxes often loom large in heirs' minds, but rarely are they a concern in reality: Only a small handful of states levy a tax on inheritances, so odds are you won’t have to pay one. But if you live in a state that does impose a tax, the specifics of your inheritance situation can dramatically change your bill.
What is inheritance tax?
An inheritance tax is a tax on assets, such as money or a home, inherited from someone who died. The person who inherits the assets pays the tax, and rates can vary based on the size of the inheritance and the inheritor's relationship to the deceased.
Inheritance tax returns and tax bills are typically due within several months of the decedent's death.
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When is an inheritance taxable?
Inheritance taxes typically apply when assets are passed down to you from someone who is not an immediate family member. The deceased’s spouse is typically exempt, meaning money and items that go to them aren't subject to inheritance tax. Children of the deceased are also sometimes exempt.
Some states also exempt up to a certain amount from inheritance tax. This could mean that if the threshold is $10,000 in your state and you inherit something worth $15,000, you may be subject to taxes on only the $5,000 that exceeds the threshold.
» Learn more aboutinherited IRAsand how they work
Is there a federal inheritance tax?
There is no federal inheritance tax.
In 2024, only six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — have a tax on inherited assets. Beginning next year, Iowa will phase out its state inheritance tax, eliminating it completely for deaths occurring on or after Jan. 1, 2025.
How much is inheritance tax?
Inheritance taxes are set by the state, so where you live, the specifics of your inheritance, and your own tax situation are factors in how much and whether you pay.
Inheritance tax rates by state
Here's a general overview of inheritance tax rates in states that impose them. This information is current as of 2023 — the most recently available data from each state's tax and revenue department — but be sure to visit your state's tax authority for an exhaustive list of rules and exemptions.
State | Inheritance Tax Rates | Who is Exempt | Other Rules |
|---|---|---|---|
Iowa | 2% to 6%. |
| If the value of the deceased's estate is deemed to be less than $25,000, no inheritance tax is levied. |
Kentucky | 4% to 16%. |
| Other relatives may be exempt on up to $500 or $1,000 worth of inherited assets, depending on their relationship to the deceased. If inheritance taxes are paid within nine months of the decendent's death, a 5% discount may apply. |
Maryland | 10%. |
| Property worth $1,000 or less is exempt from tax. |
Nebraska | 1% to 15%. |
| Other close relatives may be exempt on up to $40,000 to $100,000 worth of inherited assets, depending on their relationship to the deceased. |
New Jersey | 11% to 16%. |
| Other close relatives may be exempt on up to $25,000. |
Pennsylvania | 4.5% to 15%. |
| If inheritance tax is paid within three months of decendents death, tax is dicounted by 5%. |
Sources: Iowa Department of Revenue; Kentucky Department of Revenue; Maryland.gov; Nebraska Legislature; NJ.gov; Pennsylvania Department of Revenue
Inheritance taxes vs. estate taxes
Inheritance tax and estate tax are two different things. Inheritance tax is what the beneficiary — the person who inherited the wealth — must pay when they receive it. Estate tax, on the other hand, is the amount that’s taken out of someone’s estate upon their death based on the value of the estate. One, both or neither could be a factor when someone dies.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024, and the federal estate tax rate ranges from 18% to 40%. Some states also have estate taxes, and they might have much lower exemption thresholds than the IRS. Assets that spouses inherit generally aren't subject to estate tax.
Because the estate tax and inheritance tax are different, some people can occasionally get hit with a double whammy. Maryland, for example, has an estate tax and an inheritance tax, which means an estate might have to pay the IRS and the state, and then the beneficiaries might have to pay the state again out of what’s left. However, this isn't the norm across the country.
States that have estate taxes, inheritance taxes or both:
» Dive deeper: Establishing state residency to ease your tax burden
Do you pay capital gains on inheritances?
If assets appreciate after you inherit them, you might need to pay capital gains tax if you sell the assets. The capital gains tax rate is based on, among other things, the profit you make. For example, if your father leaves you a stock portfolio worth $200,000 on the day he died, and you sell it all for $350,000 two years later, you might owe capital gains tax on the $150,000 gain.
Certain types of inheritances might also create taxable income. For example, if you inherit an IRA or 401(k), the distributions you take might be taxable. States might have their own capital gains tax rules, so it's a good idea to seek qualified advice. There are strategies to reduce capital gains taxes that could be a consideration.
How to avoid inheritance tax
If you live in a state that imposes inheritance taxes, there are a few ways to minimize the bill on handed-down assets.
Many states don’t tax gifts. Keep in mind that gifts don’t have to be cash — stocks, bonds, cars or other assets count, too.
You can take steps ahead of time to ensure beneficiaries are in the best situation possible. These estate-planning vehicles include living trusts, irrevocable trusts and grantor retained annuity trusts.
Getting help from a qualified tax expert can also be key. Several financial pros may be able to help you find ways to avoid or navigate inheritance tax, including estate planning attorneys, certified public accountants (CPAs) and certified financial planners (CFPs).
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