What are inheritance taxes?

If a person receives money or property from someone who passed away, they may owe taxes on the inheritance.

Six states charge an inheritance tax, with varying rules on how it’s treated. An inheritance tax bill depends on the beneficiary’s relationship to the deceased, where the deceased lived or owned property and the value of the inheritance.

Read on to learn more about inheritance taxes. 

Key takeaways

• An inheritance tax is a state tax that some heirs pay when receiving assets from a deceased person’s estate. 
• Six states impose an inheritance tax, and they each set different tax rates and exemptions.
• Estate taxes are different because they’re subtracted from the estate before the remaining assets are distributed. 

An inheritance tax is a state tax you may pay if you receive property or money from a deceased person.

In contrast to the estate tax, an inheritance tax is paid by the person who inherits the assets. Tax rates vary, based on the state where the deceased lived or owned property, the value of the assets, and the beneficiary’s relationship to the deceased.

As of 2023, only six states impose an inheritance tax, and some beneficiaries are exempt from paying it.

After someone dies, a representative—the “executor”—carries out the deceased person’s wishes. The executor distributes the deceased person’s assets to beneficiaries who are specified in the deceased’s will. Those beneficiaries may pay inheritance taxes on what they receive, depending on state law.

Some states might exempt certain heirs from the tax or choose not to tax certain assets. For instance, life insurance paid to named beneficiaries isn’t typically subject to an inheritance tax.

Each state that imposes the inheritance tax has a different tax rate and method for calculating it.

Here’s what you’ll need to know to estimate an inheritance tax:

• Who pays the inheritance tax? It typically depends on the beneficiary’s relationship to the deceased person. For instance, surviving spouses and children are often exempt from the inheritance tax.
• How much of the inheritance is subject to tax? If you must pay the inheritance tax, a portion of the assets might be exempt. For example, a beneficiary might only have to pay taxes if the value of the inheritance is more than $25,000.
• What’s the tax rate? Inheritance tax rates vary anywhere from 1% to 16%, depending on the state and the value of the inheritance.

There’s no inheritance tax at the federal level, but six states do levy this type of tax. Each state sets its own tax rates, tax thresholds and exemptions. 

• Iowa: An inheritance tax generally applies if the value of the estate exceeds $25,000. The tax rate ranges from 3% to 9%, and certain beneficiaries, such as surviving spouses and children, are exempt. However, Iowa is phasing out the tax for everyone by 2025.
• Kentucky: The tax rate in Kentucky is on a sliding scale based on the size of the inheritance, plus a percentage that ranges from 4% to 16%. Certain beneficiaries, such as surviving spouses, children and siblings, are totally exempt, while others may exempt either $500 or $1,000. 
• Maryland: No taxes are due if the estate is valued at less than $50,000. The tax rate is 10% for estates that exceed the limit. Immediate family members are generally exempt, and some beneficiaries may exempt up to $1,000. 
• Nebraska: Surviving spouses and children are fully exempt, and other beneficiaries are exempt up to $100,000. Depending on the heir’s relationship to the deceased, the tax rates are 1%, 11% or 15%. 
• New Jersey: Immediate family members and charitable organizations are fully exempt, while others may be able to exempt up to $25,000. The tax rate ranges from 11% to 16%, depending on the size of inheritance and the relationship to the deceased.
• Pennsylvania: Surviving spouses and minor children are fully exempt, while other heirs may exempt up to $3,500. The tax rate ranges from 4.5% to 15%. 

Estate taxes and inheritance taxes are both based on the value of a deceased person’s property. But estate taxes are paid by estates, and inheritance taxes are paid by the heirs receiving assets from the estate.

Here are some other differences between the two:

If you’re planning to leave money or property to heirs, there are certain ways to reduce the tax liability on inheritance taxes:

• Give cash gifts. In 2023, an individual can give any one person up to $17,000 a year tax free. And if you’re married and file a joint return, you can give up to $34,000 tax free. You may give up to $12.92 million over the course of your lifetime before paying taxes on cash gifts. 
• Make charitable donations. You may also be able to lower your tax burden by transferring some of your wealth through a charitable lead trust or a charitable remainder trust.  
• Set up a trust fund. A trust is a type of fiduciary agreement in which a neutral third party is responsible for acting in the best interest of another party. Trust funds are tax advantaged and allow you to pass assets to family members, loved ones and even charities. 

Is an inheritance subject to income tax?

If you live in one of the six states that charge an inheritance tax, you may owe money on what you received. The tax you pay depends on where you live, your relationship to the deceased person and how much you receive.

When a person dies, any money and property they leave to beneficiaries may be taxable. Whether the inheritance is taxable depends on where the deceased person lived or owned property, their familial relationship to the beneficiaries and the value of the inheritance. And unlike an estate tax, inheritance taxes are paid by the beneficiaries.

When you’re estate planning, you can also familiarize yourself with laws surrounding inherited debt and how to file taxes correctly to maximize your return.