What You Need to Know About Inheritance Taxes

Inheritance taxes, often confused with estate taxes, are levied on the beneficiaries of an estate rather than the estate itself. The rules and rates can vary significantly depending on the state you reside in, as only a handful of states in the U.S. impose this tax. Moreover, the relationship between the deceased and the beneficiary can influence the tax rate, with closer relatives often receiving more favorable rates. It’s essential to be aware of exemptions and deductions that might apply, which can significantly reduce the tax burden.

A financial advisor may be able to help you understand your tax liabilities associated with investments, passive income streams, inheritances and other windfalls.

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What Is an Inheritance Tax?

An inheritance tax requires beneficiaries to pay taxes on assets and property they’ve inherited from someone who has died. Sometimes an inheritance tax is used interchangeably with the term “estate tax.” Both are forms of so-called death taxes, but they’re two different types of taxes. By definition, estate taxes are taxes on someone’s right to transfer ownership of their entire estate to family, friends and others when they die. The most important factor here is property value.

If the value of the assets being transferred is higher than the federal estate tax exemption (which is $13.99 million for tax year 2025 and $13.61 million for tax year 2024), the property can be subject to federal estate tax. States have their exemption thresholds as well. Estate taxes are deducted from the property that’s being passed on before a beneficiary claims it.

In contrast, inheritance taxes focus on the heir who has inherited the property. While it’s possible to owe estate taxes at the state and/or federal level, inheritance taxes are only collected by states.

As of 2025, only five states impose an inheritance tax, down from six in recent years. That’s because Iowa has fully repealed its inheritance tax as of Jan. 1, 2025, after a few years of slowly phasing it out. So if you’re inheriting something from a person who lived in any of the following states, your inheritance might be subject to taxes:

Maryland
Kentucky
New Jersey
Pennsylvania
Nebraska

Even if you’re an heir and you live in any of these states, you’re off the hook if the benefactor who left you the inheritance lived in one of the other 45 states or Washington D.C.

Who Has to Pay an Inheritance Tax?

SmartAsset: What You Need to Know About Inheritance Tax

Again, there are only five states with inheritance taxes. Overall, inheritance tax rates vary based on the beneficiary’s relationship to the deceased person.

Spouses are automatically exempt from inheritance taxes. That means that if your husband or wife passes away and leaves you a condo, you won’t have to pay an inheritance tax at all even if the property is located in one of the states mentioned above. Since the Supreme Court’s ruling, the same rule applies to same-sex spouses.

Children and grandchildren who receive an inheritance aren’t taxed either if the deceased person lived in any of these states: New Jersey, Kentucky or Maryland. The bad news is that all other relatives – and kids and grandkids receiving property from Pennsylvania and Nebraska – may be required to pay taxes.

Also, keep in mind that states have different rules regarding how much of an inheritance is automatically exempt from tax. For example, a sibling of a person in New Jersey can inherit up to $25,000 without owing inheritance tax on the property. For inheritances above $25,000, they’ll pay a tax that ranges between 11% and 16%.

How Much Is the Inheritance Tax?

The federal inheritance tax ranges from 18% to 40% but each state has its separate range. Here’s a breakdown of each state’s inheritance tax rate ranges:

Pennsylvania: 0% – 15%
New Jersey: 0% – 16%
Nebraska: 1% – 15%
Maryland: 0% – 10%
Kentucky: 0% – 16%

Rates and tax laws can change from one year to the next. For example, Indiana once had an inheritance tax, but it was removed from state law in 2013.

How to Avoid and Minimize Inheritance Taxes

Besides getting married or convincing your family members to move, there are other steps you can take if you’re trying to figure out how to avoid an inheritance tax.

One option is convincing your relative to give you a portion of your inheritance money every year as a gift. In 2025, anyone can give another person up to $19,000 within the year (up from $18,000 in 2024) and avoid reporting the gift or paying a gift tax. Married couples who have joint ownership of property can give away up to double that limit, capping out at $38,000 (up from $36,000 in 2024).

As an alternative strategy, you could ask your loved one to set up a revocable trust. That way, they can set aside their property and investments for you and their other beneficiaries without having to be concerned with inheritance taxes.

When a trust is revocable, whoever put their assets into it can take them back out if necessary. On the flip side, once something goes into an irrevocable trust, it remains in there permanently until the person who established the trust dies and everything is handed over to the heirs.

Bottom Line

When you’ve lost someone you love, the last thing you want to think about is paying taxes on the property you’ve inherited. That’s why if your relatives live in a state with an inheritance tax, it might be a good idea to talk to them about trusts and estate planning as soon as possible. There may also be income taxes that you have to pay if you’ve inherited an account like an IRA or a 401(k).

Tips for Estate Planning

Estate planning can be complicated, so it pays to be prepared. A financial advisor can be a solid resource to lean on. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Estate planning can be complex, and that’s especially true if you’re someone with significant wealth. To make sure you have everything you need, read up on the essential estate planning tools for wealthy investors.
If you want your beneficiaries to avoid a potentially long and costly probate process, consider creating a revocable living trust. This estate planning tool could give you the flexibility that you cannot get from other trusts or wills.