:max_bytes(150000):strip_icc()/willyoupaystatetaxesoninheritance-827f5800398a44b98ebe50fd0c7d7c2d.jpg "Will You Have To Pay State Taxes on Your Inheritance? (1)")
An inheritance tax is one that's imposed on heirs when they receive assets from a deceased person's estate. An inheritance tax is not based on the overall value of the estate; that's an estate tax. It's based on the relationship between the beneficiary and the decedent, as well as the value of that specific item of inherited property. It's also based on where the decedent lived.
Both taxes are often lumped together as "death taxes," and not every state has death taxes. In fact, only six states charge an inheritance tax. Even if your state has an inheritance tax, you may not have to pay it. Keep reading to learn more.
Key Takeaways
- Inheritance tax is imposed at the state level and not all states have one.
- The rule applies to the state where the deceased lives, not where the beneficiary lives.
- Some family members, like spouses and children, may be exempt from paying an inheritance tax, while nieces, nephews, and other relatives may have to pay it—but this all depends on the state.
- Executors of the estate are likely to pay any inheritance taxes owed by named beneficiaries.
States With an Inheritance Tax
The U.S. states that collect an inheritance tax include:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
Each state has its own laws dictating who is exempt from the tax, who will have to pay it, and how much they'll have to pay.
Maryland imposes both an estate tax and an inheritance tax. New Jersey did as well until its estate tax was repealed in 2018. Iowa is also phasing out the inheritance tax which it plans to eliminate completely by 2025.
State rules usually include thresholds of value for the estate to determine if a death tax should be paid. Estates that fall below these exemption amounts aren't subject to taxes in the state. For example, let's say you're 25 years old and inherit $100,000 from your family friend, but your state has an exemption of $25,000. You would only pay inheritance tax on $75,000. Iowa is one of the states that doesn't impose an inheritance tax when a net estate is valued at $25,000 or less.
Nebraska is another state with exemption amounts, and it doesn't charge an inheritance tax if the beneficiary is under the age of 22.
State Inheritance Tax Rates and Exemptions
| State | Inheritance Tax Rate | Exemption |
|---|---|---|
| Iowa | 3% to 9% for 2022 2% to 6% for tax year 2023 0% to 3% for tax year 2024 no inheritance tax in 2025 and thereafter | $25,000 |
| Kentucky | 4% to 16% | $500 or $1,000 |
| Maryland | 10% | $0 |
| Nebraska | 1% to 18% for tax year 2022 1% to 15% for tax year 2023 | $10,000, $15,000, or $40,000 for 2022 $25,000, $40,000, or $100,000 for 2023 |
| New Jersey | 11% to 16% | $25,000 |
| Pennsylvania | 4.5% to 15% | $0 |
Is There a Federal Inheritance Tax?
The federal government doesn't have a specific inheritance tax. Instead, it has an estate tax. The estate tax is a tax on the right to transfer property at your death. All of your property is totaled at its fair market value to equal your gross estate. This may include cash, investments, real estate, insurance, trusts, annuities, business interests, and more.
However, most estates will not have to pay the federal estate tax and file an estate tax return. A federal estate tax is only applied to the part of the gross estate that exceeds the lifetime exclusion, which is $12.06 million for tax year 2022, and $12.92 million for tax year 2023.
Other inheritances may be taxed if they are required to be included with the heir or beneficiaries' taxable income.
Certain retirement accounts, such as 401(k)s and IRAs, are taxed as income, but only when withdrawals are made from the accounts by the beneficiary. And if you inherit property or assets that generate income or interest, that income or interest is typically taxable to you after you take possession of the bequest.
Is Your Inheritance Subject to a State Tax?
If the deceased person lived in a state with an inheritance tax, you could be subject to that state's tax. The other instance is if a bequest—such as real estate—is physically located there.
Note
The rules don't depend on where you live, but rather where the decedent lived or owned property.
How the Inheritance Tax Works
Let's say you live in California—which does not have an inheritance tax—and you inherit from your uncle's estate. He lived in Kentucky at the time of his death. You would owe Kentucky a tax on your inheritance because Kentucky is one of the six states that collect a state inheritance tax.
The flip side is if you live in Kentucky and your uncle lived in California at the time of his death. Your inheritance would not be subject to taxation in this case because California hasn't collected an inheritance tax since 1982. Assuming your inheritance isn't physically located in Kentucky, it wouldn't be subject to that state's tax even though you live there.
You would be subject to Kentucky's inheritance tax if your uncle was a California resident who owned the property in Kentucky that you were inheriting because your bequest is physically located there. But if you inherited an asset that was located in California, your inheritance would not be affected by the fact he owned other property elsewhere.
Let's say you inherit cash instead, valued at $250,000. Based on Kentucky's inheritance tax rates and exemptions, as the niece or nephew of your uncle, you'd owe an inheritance tax worth $22,960 plus 16% of the amount over $200,000 (so 16% of $50,000). The tax would work out to $30,960. You'd get to keep $219,040.
How Are You Related to the Decedent?
None of the six states with an inheritance tax impose it on surviving spouses. New Jersey exempts domestic partners as well, and Maryland has exempted jointly-held primary residences inherited from domestic partners since July 1, 2009.
Descendants—children and grandchildren—aren't taxed, either, in four of the six states that impose this tax. Nebraska and Pennsylvania are the exceptions. Your inheritance would be subject to the Pennsylvania inheritance tax if you inherited from your father and he lived there. Nebraska also doesn't charge an inheritance tax if the beneficiary is under the age of 22.
Your inheritance would not be subject to a Kentucky inheritance tax if you're the decedent's spouse, son, daughter, or grandchild. As the decedent's niece or nephew, however, you'd pay an inheritance tax, and if you were not related at all, you'd pay the highest inheritance tax rate.
How Inheritance Tax Is Calculated and Paid
You might not have to deal with personally sending a check to the state taxing authority if your gift is subject to an inheritance tax.
The executor of the estate will most likely calculate the tax due on each individual bequest from the estate based on that state's applicable rate for each beneficiary, then subtract what you owe from the amount of your bequest. But this only works if you inherit cash. You'd receive a check for the balance.
You'll probably have to pay out of pocket if you inherit a tangible asset. Although, some decedents will leave instructions in their wills that the estate will pick up any inheritance tax that's owed by each beneficiary.
The Bottom Line
An heir's inheritance will be subject to a state inheritance tax only if two conditions are met: The deceased person lived in a state that collects a state inheritance tax or owned bequeathed property located there, and the heir is in a class that isn't exempt from paying the tax. The state where the heir lives is irrelevant.
Frequently Asked Questions (FAQs)
Is an inheritance considered income for federal tax purposes?
Inheritance is generally not considered taxable income for federal tax purposes. However, any money earned on the inheritance—whether it's cash, property, or investments—can be considered taxable.
What is the difference between an inheritance tax and an estate tax?
An inheritance tax is levied at the state level and is paid by the person who receives the inheritance. An estate tax is paid from the estate. There is a federal estate tax and some states also levy an estate tax. There is no federal inheritance tax, but some states have one. There are thresholds that determine how much is exempt before either the inheritance or estate tax kicks in.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Urban Institute and Brookings Institution Tax Policy Center. "How Do State Estate and Inheritance Taxes Work?"
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IRS. “IRS Provides Tax Inflation Adjustments for Tax Year 2023.”
IRS. "Estate Tax."
IRS. "Instructions for Form 706," Page 2.
IRS. "401(k) Plan Overview."
IRS. "Topic No. 451 Individual Retirement Arrangements (IRAs)."
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The American College of Trust and Estate Counsel. “State Death Tax Chart.”
Tax Foundation. "Does Your State Have an Estate or Inheritance Tax?"
Kentucky Department of Revenue. "A Guide to Kentucky Inheritance and Estate Taxes."
Comptroller of Maryland. "Filing the Estate Tax Return."
New Jersey Treasury Division of Taxation. "The Domestic Partnership Act - New Jersey Income Tax/Inheritance Tax (2/18/04)."
Pennsylvania Department of Revenue. "Inheritance Tax."
Nebraska Legislature. "Nebraska Revised Statute 77-2001."
