# Inheritance Tax: What It Is, How It's Calculated, and Who Pays It

> **Definition**
>
> An inheritance tax is a levy potentially paid by the recipient of assets inherited from a deceased individual. Just five states have an inheritance tax as of 2025.

## What Is Inheritance Tax? Definition & Basics

An inheritance tax is a tax imposed on the recipient ([beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp)) of an estate, meaning the person receiving assets from a deceased individual may be responsible for paying it. 

Individuals who live in Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania and are bequeathed [assets](https://www.investopedia.com/terms/a/asset.asp) may have to pay a tax on their inheritance. This inheritance tax is levied on the value of the bequeathment received by the beneficiary, and the beneficiary pays it.

### Key Takeaways

*   An inheritance tax is paid by the beneficiary on the value of the assets they inherit.
*   Inheritance tax is not a federal tax, so it only affects residents of certain states.
*   Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are the only states where inheritance tax may apply.
*   Exemptions and thresholds for inheritance tax vary by state, with many states providing favorable terms for immediate family members.

![Inheritance Tax](https://www.investopedia.com/thmb/FxDMFJVy5m4lVMhqaNIQmcQxu3k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/inheritancetax.asp-final-96944c15e1cc4e17b4b94d7b88eb8cec.jpg)

*— Investopedia / Candra Huff*

## How the Inheritance Tax Works 

Whether you have to pay an [inheritance](https://www.investopedia.com/terms/i/inheritance.asp) tax and how much that tax will be depends on a few factors. The first is what state or states the decedent lived or owned property—this will determine whether the beneficiary must pay the tax and how much. As a beneficiary, your state's inheritance tax rule, if any, doesn't apply. That means that if the individual who gave you an inheritance lived in a state without an inheritance tax, you won’t have to pay it.

If they did live in a state with an inheritance tax, the next determining factor is your relationship to the deceased. Most states with an inheritance tax have carve-outs for immediate family members (spouses, parents, children, siblings), so these individuals won’t be responsible for paying this tax in those states. 

Certain states provide exemptions for immediate family members up to a certain threshold of the value of the bequeathment. That value is the final determining factor of whether you have to pay an inheritance tax and how much. Each state has its own limits, but they are often generous. Only around 2% of people typically ever have to pay an inheritance tax.

### Inheritance Tax Exemptions and Thresholds

Each state has its own family member exemptions and thresholds for when an inheritance tax is levied. There is no federal inheritance tax. Here they are, broken down by state (note: Iowa eliminated its inheritance tax as of this year, meaning it doesn’t apply to assets bequeathed from individuals who died on or after Jan. 1, 2025).

### Kentucky

Immediate family members (spouses, parents, children, siblings) are exempt; other family members (excluding cousins) are exempt up to $1,000, and the tax rate is 4% to 16%. Cousins and other beneficiaries are exempt up to $500, and the tax rate is 6% to 16%. The [state](https://revenue.ky.gov/Individual/Inheritance-Estate-Tax/Pages/default.aspx) charges minimum amounts plus a percentage at certain thresholds.

### Maryland

Immediate family (parents, grandparents, spouses, children, grandchildren, siblings) and charities are exempt, as are beneficiaries from small estates valued at $50,000 or less. Other recipients are exempt up to $1,000. The tax rate is 10%.

### Note

Maryland is currently the only state that imposes both an estate tax and an inheritance tax.

### Nebraska

Spouses, relatives under the age of 22, and charities are fully [exempt](https://www.cfra.org/sites/default/files/PDFResources/Farm%20Resource%20pages/NE%20Inheritance%20Tax%202022%20update.pdf). Immediate family members (parents, grandparents, siblings, children, grandchildren) are exempt up to $100,000 and pay a 1% tax on inheritances exceeding that amount. Other relatives are exempt up to $40,000 or are subject to an 11% tax, while unrelated heirs are exempt up to $25,000 or pay 15%.

### New Jersey

Immediate [family](https://www.nj.gov/treasury/taxation/pdf/other_forms/inheritance/transferinheritanceclasses.pdf) (spouse, children, parents, grandparents, grandchildren) and charitable organizations are exempt. Siblings and sons/daughters-in-law are exempt up to $25,000. The tax rate ranges from 11% to 16%, depending on the size of the inheritance and the familial relationship.

### Pennsylvania

Spouses and children 21 years old and younger are exempt. Adult children, grandparents, and parents are exempt up to $3,500. The tax rate is 4.5%, 12%, or 15%, depending on the relationship.  

## Inheritance Tax vs. Estate Tax

While an inheritance tax and an [estate tax](https://www.investopedia.com/articles/personal-finance/120715/estate-taxes-who-pays-what-and-how-much.asp) both may apply after someone's death, they are distinct taxes with different triggers.

*   **Estate tax**: Assessed on the estate itself before its assets are distributed, while an inheritance tax may be imposed on the beneficiaries of a bequest. 
*   **Inheritance Tax:** Imposed on the value of the inheritance received by a beneficiary, and it is the beneficiary who must pay it.

Both levies are based on the [fair market value](https://www.investopedia.com/terms/f/fairvalue.asp) of a deceased person's property, usually as of the date of death. But an estate tax is levied on the value of the decedent's estate, and the estate pays it. In contrast, an inheritance tax is levied on the [value of an inheritance](https://www.investopedia.com/articles/personal-finance/092515/i-just-inherited-money-now-what.asp) received by the beneficiary, and it is the beneficiary who pays it.

The distinction between an estate tax and an inheritance tax with identical rates and exemptions might make no difference to a sole heir. However, in rare situations, an inheritance could be subject to estate and inheritance taxes.

## Avoiding the Inheritance Tax

Most people will not end up paying an inheritance tax, given the carve-outs for immediate family members and exemptions for inheritances up to certain amounts. However, residents with significant assets in a state with an inheritance tax may still want to take steps to minimize the exposure for their heirs.  

> **Tip**
>
> One common strategy is to buy a life insurance policy equal to the sum you wish to bequeath and make the person you want to leave it to the policy's beneficiary. The death benefit from an insurance policy is not subject to inheritance taxes.

You could also put assets in a trust—preferably an [irrevocable trust](https://www.investopedia.com/terms/i/irrevocabletrust.asp). This effectively removes these assets from your estate and their classification as an inheritance upon your death. You can set up a schedule to distribute the funds when you establish the trust.

## Which states currently charge inheritance tax?

As of 2025, six states impose inheritance taxes: Iowa (currently being phased out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates are typically between 1% and 16%, varying by relationship and state.

## Who is required to file inheritance tax returns?

Beneficiaries are typically responsible for filing inheritance tax returns and paying tax, though, depending on local rules, executors can submit them on their behalf in some states.

## The Bottom Line

Only residents of five states—Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—are at risk of paying an inheritance tax on assets they receive from a decedent. Even among these state’s residents, only those who aren’t immediate family members and/or those receiving large inheritances will have to pay the tax. If you live in one of these states and want to help your beneficiaries avoid a tax, consider a life insurance policy or establishing a trust.

> **Article Sources**
>
> 1.  Intuit TurboTax. "[What Are Inheritance Taxes?](https://turbotax.intuit.com/tax-tips/estates/what-are-inheritance-taxes/L93IUc3sC)"
>     
> 2.  Iowa Department of Revenue. "[Iowa Inheritance Tax Rates: 2024.](https://revenue.iowa.gov/media/3955/download?inline)"
>     
> 3.  Kentucky Department of Revenue. "[Inheritance & Estate Tax](https://revenue.ky.gov/Individual/Inheritance-Estate-Tax/Pages/default.aspx)."
>     
> 4.  Maryland General Assembly. "[Statutes Text](https://mgaleg.maryland.gov/mgawebsite/Laws/StatuteText?article=gtg&section=7-203&enactments=false)."
>     
> 5.  Register of Willis Association. "[Administration of Estates in Maryland](https://registers.maryland.gov/main/publications/Administration%20of%20Estates%20Pamphlet%202022.pdf)."
>     
> 6.  Tax Foundation. "[Estate and Inheritance Taxes by State, 2024](https://taxfoundation.org/data/all/state/estate-inheritance-taxes/)."
>     
> 7.  Center For Rural Affairs. "[Nebraska Inheritance Tax](https://www.cfra.org/sites/default/files/PDFResources/Farm%20Resource%20pages/NE%20Inheritance%20Tax%202022%20update.pdf)."
>     
> 8.  The State of New Jersey. "[Inheritance Tax Beneficiary Classes](https://www.nj.gov/treasury/taxation/pdf/other_forms/inheritance/transferinheritanceclasses.pdf)."
>     
> 9.  NJ Treasury. "[Inheritance Tax Rates](https://www.nj.gov/treasury/taxation/inheritance-estate/tax-rates.shtml)."
>     
> 10.  Commonwealth of Pennsylvania. "[Inheritance Tax](https://www.pa.gov/agencies/revenue/resources/tax-types-and-information/inheritance-tax.html)."
>      
> 11.  Internal Revenue Service. "[Life Insurance & Disability Insurance Proceeds](https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds),'