Inheritance tax is a state tax imposed on a beneficiary who has received assets from a decedent (deceased person).
What you need to know
Inheritance tax is paid by a beneficiary, not the estate.
There is no federal inheritance tax, only state inheritance taxes.
The amount depends on the value of inheritance and relationship to the decedent.
Generally, the closer you are to the decedent, the lower rate you will have to pay.
Only six states have inheritance tax.
Inheritance tax is just a state tax that is occasionally paid on inherited assets.
So if you got some money from a relative who recently passed and you live certain states, you may have to take a portion of that and give it back to the state.
There are only six states that impose the tax:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- and Pennsylvania
However, if you live in Iowa, you’re in luck because they are eliminating the tax for any deaths that occur after January 1, 2025.
If you have to pay inheritance taxes on an asset you receive, rates normally begin in the single digits and can rise all the way up to 18%.
This rate depends on the state you’re in, the value of the assets, and your relationship to the decedent. Generally, the closer you are to the decedent, the lower rate you will have to pay. There are exemptions to paying inheritance tax such as spouses, who are completely exempt in all 6 states, or if you are receiving a life insurance payout.
Inheritance taxes vs. estate taxes
Inheritance taxes and estate taxes can easily be mistaken for each other, but they are two different forms of taxes.
They have similarities, such as they are both based on the fair market value of the assets. However, estate tax is based on the value of the decedent’s estate as a whole, and the estate pays the tax. On the flip side, inheritance tax is based on the value of specific assets a beneficiary receives, and the beneficiary pays the tax.
Here's a breakdown of which states have estate and inheritance taxes:
What to do when a loved one dies
When people die, they leave behind a life that must be closed out. Don't tackle it all alone. From planning the funeral to tackling the legal & financial estate, here's an ultimate checklist of all the things an executor needs to do following the loss of a loved one.
Learn moreJoe lives in Pennsylvania. He dies and leaves his wife, Kathy, $50,000. He also leaves both of his kids the residuary estate, each getting 50%. Because Joe lived in Pennsylvania, both his wife and kids are excluded from inheritance tax.
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Jack Wilkes
Jack Wilkes is a trust professional and Private Wealth Client Account Manager at Northern Trust Wealth Management in Boston, MA.
Jack received his undergraduate degree in Trust and Wealth Management from Campbell University in North Carolina, along with a minor in Financial Planning. Jack continued his education with an MBA in Financial Services, also from Campbell University.
Jack is a frequent industry writer on trust, wealth management and fiduciary topics.
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