Losing a loved one is hard. On top of the grief, dealing with taxes on inherited property can feel overwhelming. Many people confuse inheritance taxes with estate taxes. While both are related to death, they work in different ways. This guide to inheritance tax will walk you through the essentials so you know what to expect.
What Is the Tax on Inheritance?
An inheritance tax is a state-level tax imposed on those who receive assets from someone who has passed away. Unlike estate taxes, which apply to the deceased person’s estate, inheritance taxes apply to the heirs. These taxes vary depending on where you live and your relationship to the deceased.
Estate taxes come from the total value of someone’s property before it is passed on. The federal estate tax only applies if the estate exceeds $13.99 million in 2025. Anything below that amount is exempt at the federal level. States have their own rules, and not all states follow federal thresholds.
Inheritance taxes, on the other hand, are only collected by five states as of 2025. These are Maryland, Kentucky, New Jersey, Pennsylvania, and Nebraska. Iowa used to impose inheritance taxes, but officially ended them on January 1, 2025. Inheritance taxes depend more on the deceased’s location than on yours. If your loved one lived in any of these states, you might owe taxes, even if you live somewhere that doesn’t charge them.
Keep in mind, not just property and cash are taxed. Inherited retirement accounts like IRAs and 401(k)s may come with income tax responsibilities, depending on how they are structured and withdrawn.
Who Pays Inheritance Tax?
The answer depends on two things: the state involved and your relationship with the deceased. If the person who passed lived in one of the five states mentioned, you might owe taxes.
However, not everyone has to pay. Spouses are completely exempt in all five states. That includes same-sex spouses, too. Children and grandchildren are usually exempt in Maryland, New Jersey, and Kentucky. Unfortunately, Pennsylvania and Nebraska may still tax them. Other relatives, like siblings or cousins, might owe taxes, depending on the size of the inheritance.
For example, in New Jersey, a sibling can receive up to $25,000 tax-free. Anything beyond that is taxed between 11 percent and 16 percent.
Inheritance Tax Rates in the U.S.
Each state sets its own rate. There is no federal inheritance tax, but these state rates apply if the deceased lived in one of the five states:
- Pennsylvania: 0 percent to 15 percent
- New Jersey: 0 percent to 16 percent
- Nebraska: 1 percent to 15 percent
- Maryland: 0 percent to 10 percent
- Kentucky: 0 percent to 16 percent
These rates are not random. They depend on how closely you were related to the deceased and the value of what you inherited.
How Inheritance Tax Planning Can Help You
Inheritance tax planning can help you reduce or avoid paying too much. One simple method is gifting. In 2025, an individual can give someone up to $19,000 each year without triggering gift taxes. Married couples can give up to $38,000 jointly.
Another effective option is setting up a revocable trust. This allows someone to place assets in a trust while staying in control of them. When that person dies, the trust passes the property to the heirs. In many cases, this can lower or even eliminate inheritance tax.
There is also the irrevocable trust, where the assets cannot be changed once placed. This type may offer more protection from taxes but less flexibility.
Talking with a financial advisor can help you choose the right approach. Advisors can explain how your investments, retirement accounts, and windfalls might be taxed.
Steps to Take After Receiving an Inheritance
After receiving an inheritance, start with the paperwork. Gather legal documents and figure out if any taxes apply. If you’re unsure, speak to a professional.
Here are a few smart steps:
- Check which state the deceased lived in.
- Learn your exemption based on your relationship.
- Ask if a trust was involved in the inheritance.
- Understand how inherited retirement accounts work.
The Legacy Is More Than the Inheritance
What you leave behind isn’t just money or property. It’s also clarity, peace, and intention. Taking time to understand inheritance tax rules today can spare your loved ones confusion and stress tomorrow. A well-prepared plan not only protects your estate, it also preserves your values.
Use what you’ve learned here as a starting point for meaningful conversations. Talk to your family, ask questions, and reach out to professionals who can help. The tax on inheritance doesn’t have to be a burden if you choose to face it with care and foresight.