What Is Inheritance Tax? How It Works in the U.S. and Who Pays

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Inheritance tax is a state tax on the value of property a person receives from someone who has died. The beneficiary owes it, and the rate depends mainly on how closely the beneficiary was related to the deceased. The United States has no federal inheritance tax. As of 2026, only five states levy one: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Iowa repealed its inheritance tax effective January 1, 2025.

What Is Inheritance Tax?

When someone dies, their property passes to heirs through a will, a trust or state intestacy law. An inheritance tax treats each transfer as a separate taxable event. If one estate leaves money to a spouse, a nephew and a neighbor, each of those three people is assessed on their own share, at the rate set for their relationship class.

Inheritance tax is separate from income tax. Inherited money is generally not counted in a beneficiary’s gross income for federal income tax purposes, so in the 45 states without an inheritance tax (and D.C.), receiving a bequest usually creates no tax bill for the heir at all.

How Inheritance Tax Works

Three factors decide whether a beneficiary pays and how much.

1. Where the decedent lived or owned property. The tax belongs to the state where the deceased person was domiciled. A state can also tax real estate or other property physically located there, even if the owner lived elsewhere. A beneficiary living in a state with an inheritance tax owes nothing if they inherit from someone who lived in, and owned property in, a state without one.
2. The beneficiary’s relationship to the decedent. Each state sorts heirs into classes. Spouses sit in the most favored class everywhere. Children, grandchildren and parents are usually exempt or taxed lightly. Siblings are treated differently from state to state, and unrelated heirs face the highest rates.
3. The value received. Many classes have an exemption amount, and tax applies only to value above it. Some states also use graduated brackets, so the rate rises as the inheritance gets larger.

Property is generally valued at fair market value as of the date of death. States typically allow certain deductions, such as the decedent’s debts and funeral or administration costs, before the taxable share is figured, though the rules vary by state.

State rules at a glance

Kentucky. Class A beneficiaries (spouses, parents, children, grandchildren and siblings) are fully exempt. Class B beneficiaries, which covers other relatives such as nieces, nephews, aunts, uncles and in-laws, are exempt up to $1,000 and taxed at 4% to 16% above that. Class C covers everyone else, including cousins and friends, with a $500 exemption and rates of 6% to 16%. Kentucky’s schedule combines a flat dollar amount with a percentage at each bracket.

Maryland. Spouses, children, grandchildren, parents, grandparents, siblings and qualifying charities are exempt. Other beneficiaries pay a flat 10%. No tax applies when the estate is valued at $50,000 or less, when it is valued at $100,000 or less and a spouse is the sole heir, or when a single person receives $1,000 or less. Maryland is the only state that levies both an inheritance tax and a state estate tax, so a large Maryland estate can be subject to both.

Nebraska. Surviving spouses, beneficiaries under age 22 and qualifying charitable transfers are fully exempt. Parents, grandparents, siblings, children and grandchildren are exempt up to $100,000 and pay 1% on the excess. Aunts, uncles, nieces, nephews and their descendants get a $40,000 exemption and pay 11% above it. Unrelated heirs get $25,000 exempt and pay 15% on the rest. Nebraska’s tax is administered at the county level.

New Jersey. Class A (spouses, civil union and domestic partners, children, parents, grandparents and grandchildren) and charities are exempt. Siblings and sons- or daughters-in-law are exempt on the first $25,000 and taxed at 11% to 16% above that, depending on the amount. All other beneficiaries, including nieces, nephews and friends, pay 15% to 16%.

Pennsylvania. Transfers to a surviving spouse are taxed at 0%, as are transfers to a parent from a child aged 21 or younger. Transfers to direct descendants and other lineal heirs are taxed at 4.5%, to siblings at 12%, and to all other heirs at 15%. A family exemption of $3,500 may be claimed by a surviving spouse, a child or a parent who lived in the decedent’s household.

Example of Inheritance Tax

The following is a hypothetical example using Nebraska’s class rules as described above. It assumes the decedent lived in Nebraska, each bequest is $100,000 after allowable deductions, and every beneficiary is 22 or older.

The estate pays out the same $100,000 four times, but the tax ranges from nothing to $11,250. If the son had received $150,000 instead, he would owe 1% on the $50,000 above his exemption, or $500.

A second hypothetical shows a flat-rate state. In Pennsylvania, a child inheriting a net $200,000 would owe 4.5%, or $9,000, while a sibling inheriting the same amount would owe 12%, or $24,000. The same bequest to a spouse would be taxed at 0%.

Inheritance Tax vs. Estate Tax

• Estate tax is charged on the total value of the estate before distribution. The executor files the return and pays the tax from estate assets. The federal government and a number of states levy one.
• Inheritance tax is charged on each beneficiary’s share, at a rate set by who receives the property. Only the five states above levy it, and there is no federal version.

The federal estate tax applies only to estates above a very large exemption amount set by Congress, so it reaches a small fraction of estates. When it does apply, heirs receive what remains after the IRS has been paid. For a sole heir, the two taxes with identical rates and exemptions could produce the same result. With several heirs, an estate tax applies one rate to the whole pool, while an inheritance tax prices each share separately.

Other taxes heirs confuse it with

Inheritance tax is a one-time charge on receipt. Taxes that can apply later are separate:

• Capital gains tax. If you sell inherited stock or real estate, you may owe capital gains tax. Inherited assets generally receive a step-up in basis to their value at the date of death, so only appreciation after death is typically taxed.
• Income tax on retirement accounts. Withdrawals from an inherited traditional IRA or 401(k) are generally taxable income to the beneficiary, because the original owner never paid tax on that money.
• Income earned after inheritance. Interest, dividends or rent produced by inherited assets are taxable to the new owner like any other investment income.

Who Files and How a Beneficiary Finds Out What Is Owed

The beneficiary bears the tax, but the paperwork usually runs through the estate. The executor or personal representative typically files the return, reports each beneficiary’s share and class, and often pays the tax from the estate before distributing the balance, which reduces the beneficiary’s share. In some states, a beneficiary receiving property outside probate (such as a jointly held account) may have their own filing responsibility.

In practice, a beneficiary learns what they owe from the executor or the estate’s attorney, who works from the state’s rate tables and the value of the assets. Filing deadlines differ by state, and some states offer a discount for early payment or charge interest on late payment.

Reducing Inheritance Tax Exposure

Because spouses and close relatives are largely exempt, planning matters most when significant assets will pass to siblings, nieces and nephews, friends or partners who don’t qualify for a favored class.

• Life insurance. Proceeds paid to a named beneficiary are generally exempt from state inheritance tax, subject to each state’s rules. Payments to the estate itself, or annuity products, may be treated differently.
• Irrevocable trusts. Assets placed in a properly structured irrevocable trust can, depending on state law and the trust terms, fall outside the taxable inheritance. A trust also lets the creator set a distribution schedule.
• Lifetime gifts. Some states tax gifts made within a set period before death as if they were inheritances, so the timing of gifts matters.
• Charitable bequests. Transfers to qualifying charities are exempt in each of these states.

Limitations of Inheritance Tax

The tax reaches a narrow group. Only about 2% of people ever pay an inheritance tax, since it applies in just five states and spares most immediate family members. Its burden falls on heirs who are not close relatives, so unmarried partners and friends can owe the highest rates on the same assets a spouse would receive tax-free.

The Bottom Line

Inheritance tax matters mostly to siblings, nieces, nephews, friends and unmarried partners who receive property from someone who lived in or owned property in Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania. Spouses and most close family pay little or nothing, while unrelated heirs can face rates up to 16%. People planning to leave significant assets outside a favored class can look at life insurance, irrevocable trusts, gift timing and charitable bequests, and heirs can confirm what they owe with the executor.