Inheritance Tax: Which States Have It & How Much You'll Pay

Estate Tax vs. Inheritance Tax: Two Completely Different Taxes

The confusion between these two taxes is widespread, and it has real financial consequences. Here is the precise distinction:

Estate tax is imposed on the estate of the deceased person. The executor pays it out of estate assets before any distributions are made. The federal estate tax in 2026 applies only to estates above $15 million (per the One Big Beautiful Bill Act, signed July 4, 2025). Twelve states and Washington D.C. impose their own estate taxes, some with exemptions as low as $1 million. The estate is the taxpayer.

Inheritance tax is imposed on the person who receives the assets — the heir or beneficiary. The rate typically depends on the heir's relationship to the deceased: closer relatives pay less (or nothing), more distant relatives and unrelated parties pay more. The heir is the taxpayer.

Maryland is the only state that imposes both. A Maryland resident who dies with a large estate could trigger both taxes: the estate pays the Maryland estate tax (up to 16% on amounts above $5 million), and certain heirs could also owe Maryland inheritance tax (10% flat rate).

The 5 States With Inheritance Tax in 2026

Iowa was the sixth state on this list until January 1, 2025, when it fully eliminated its inheritance tax — joining the broader national trend of states phasing out this levy. According to the Tax Foundation, inheritance taxes have been in steady retreat across the U.S., with several states having eliminated them in the past 15 years. Below is a detailed breakdown of what each remaining state imposes.

Pennsylvania — The Biggest Surprise for Families

Pennsylvania's inheritance tax catches many families off guard because it applies even to adult children inheriting from parents — a relationship that is exempt in most other states. Pennsylvania uses a flat-rate structure based entirely on the heir's relationship to the decedent:

A practical example: if your Pennsylvania parent dies and leaves you a house worth $400,000 and a brokerage account worth $200,000, you owe Pennsylvania inheritance tax on the full $600,000 at 4.5% — a $27,000 bill. There is no per-heir exemption that reduces this. There is a 5% discount if the tax is paid within three months of the decedent's death.

Pennsylvania does allow a deduction for estate administration expenses, funeral costs, and debts. And importantly, assets passing through a living trust are not exempt — Pennsylvania inheritance tax applies to all transfers, regardless of whether probate was involved.

New Jersey — Highest Rates for Non-Relatives

New Jersey restructured its inheritance tax classes years ago and now has the highest top rate (16%) of any inheritance tax state. Class A beneficiaries — spouses, civil union partners, domestic partners, children, grandchildren, parents, and grandparents — pay zero inheritance tax. This exemption is complete with no dollar limit.

New Jersey's Class D rate structure is progressive: 15% on the first $700,000 above the exemption, then 16% on amounts above $700,000. An unmarried domestic partner who is not a registered civil union partner — a common scenario — falls into Class D. If you have a long-term partner and live in New Jersey, the lack of formal legal status can cost your partner hundreds of thousands of dollars in inheritance tax.

Maryland — The Double-Tax State

Maryland imposes both an estate tax (on estates above $5 million at rates up to 16%) and an inheritance tax. The inheritance tax is a flat 10% on all transfers to non-exempt beneficiaries. The exempt relationship classes in Maryland are broad: spouses, children, grandchildren, great-grandchildren, parents, grandparents, stepchildren and their descendants, siblings, and siblings' descendants are all exempt. What remains taxable is a relatively narrow group — primarily unrelated heirs or more distant relatives.

Maryland provides a credit to prevent double taxation: any inheritance tax paid can be credited against the Maryland estate tax. This means that in practice, the inheritance tax often merely shifts some of the estate tax burden from the estate to individual heirs, rather than creating a genuinely additional layer of taxation. Still, the credit calculation is complex, and executors in Maryland should work with a CPA familiar with Maryland probate.

Kentucky — Expanded Exemptions in 2026

Kentucky amended its inheritance tax law effective January 1, 2026 to expand its exemptions. Previously, Kentucky exempted Class A beneficiaries (direct relatives: spouses, parents, children, grandchildren, and siblings). The 2026 change adds Class B beneficiaries to the exempt category — nieces, nephews, half-nieces, half-nephews, aunts, uncles, sons-in-law, daughters-in-law, and great-grandchildren. This is a significant expansion that effectively removes a large share of family inheritances from Kentucky's tax base.

What remains taxable in Kentucky is a Class C group — more distant relatives and unrelated heirs — at rates of 6%–16% depending on the amount. The first $1,000 received by Class C heirs is exempt; amounts above $200,000 are taxed at the 16% maximum rate.

Nebraska — Highest Rate on Non-Relatives

Nebraska uses three beneficiary classes with graduated rates within each class:

Nebraska is notable for having the only meaningful inheritance tax on direct lineal descendants among the five states (Class I, 1% above $100,000). Most other states fully exempt this group. A Nebraska child inheriting a $600,000 estate would pay 1% on the $500,000 above the exemption — a $5,000 bill. The surviving spouse is fully exempt under Nebraska law.

Nebraska imposes a serious penalty for late payment: inheritance tax must be paid within one year of death, or a 14% annual interest rate accrues. A 5% monthly penalty (up to 25% maximum) applies to unpaid balances. Executors should move quickly in Nebraska to avoid compounding costs.

Does Your State of Residence Matter — or the Decedent's?

This is a source of widespread confusion. The answer: inheritance tax is generally governed by the state where the deceased person was domiciled — not where the heir lives. If your parent lived and died in New Jersey, you may owe New Jersey inheritance tax even if you reside in Florida (which has no such tax). The inheritance tax obligation follows the decedent, not the beneficiary.

The exception involves real property: real estate is generally taxed by the state where the property is physically located. If a Pennsylvania resident owns a vacation home in New Jersey, that property may be subject to New Jersey inheritance tax for out-of-class beneficiaries — even though the decedent was not a New Jersey resident.

This creates a planning consideration for multi-state property owners. If you own real estate in an inheritance tax state but are not domiciled there, consider whether transferring it to an LLC or trust before death might simplify the estate administration — though the inheritance tax treatment of entity interests versus direct real property ownership varies by state.

What Property Is Subject to Inheritance Tax?

Each inheritance tax state has its own rules about what property counts. In general, expect the following to be included:

• Probate assets: Bank accounts, brokerage accounts, real estate, personal property, business interests passing through the will
• Non-probate assets: Joint tenancy with right of survivorship (the decedent's share), payable-on-death accounts, transfer-on-death accounts
• Retirement accounts: IRAs, 401(k)s, 403(b)s left to non-spouse beneficiaries (taxable in Pennsylvania and some others)
• Life insurance payable to the estate: Generally included in all five states

Life insurance payable to a named individual beneficiary is generally excluded from inheritance tax in most states, provided it passes outside the estate. This is one of the cleanest planning tools available in inheritance tax states. Ensuring that life insurance, retirement account beneficiary designations, and payable-on-death accounts name specific individuals rather than "my estate" is a fundamental step. Use our estate tax calculator to model your situation.

Planning Strategies for Inheritance Tax States

If you live in or own property in one of the five states, here are the most effective approaches to reduce inheritance tax exposure:

1. Annual Gifting During Life

Inheritance tax states tax transfers at death, not gifts during life. The federal annual gift tax exclusion allows you to give $19,000 per recipient per year (2026) completely free of any gift or inheritance tax implications. A couple can give $38,000 per recipient per year. Over ten years, this can remove $380,000 from the taxable estate per beneficiary. Pennsylvania, the most impactful state for family transfers, fully exempts lifetime gifts from inheritance tax — providing a powerful incentive to give earlier.

2. Beneficiary Designation Optimization

Review all account beneficiary designations — retirement accounts, life insurance, payable-on-death bank accounts, transfer-on-death investment accounts. Directing these to tax-exempt beneficiaries (or to charities) where possible keeps non-probate assets out of the inheritance tax net. In New Jersey, ensuring that domestic partners are registered civil union partners under state law moves them from Class D (15–16%) to Class A (0%).

3. Charitable Bequests

All five inheritance tax states exempt transfers to qualifying charitable organizations. If your estate plan already includes charitable giving, structuring those gifts as specific bequests in the will — rather than residuary distributions to individuals who might then donate — ensures the charity exemption applies cleanly. For larger estates, charitable remainder trusts or donor-advised funds can accomplish estate planning and charitable goals simultaneously.

4. Domicile Planning for High-Net-Worth Individuals

Changing your legal domicile to a state without inheritance or estate tax is a legitimate planning strategy, but it must be done carefully and completely. Courts in New Jersey, Pennsylvania, and Maryland have litigated domicile questions extensively. To successfully establish a new domicile, you need more than a mailing address change: change your voter registration, get a new driver's license, move most personal property, update your will to the new state, and spend a majority of your time there. Half-measures invite state tax auditors to challenge the change.

5. Irrevocable Trusts

Assets held in certain irrevocable trusts may avoid inheritance tax if the transfer is treated as complete during the grantor's lifetime, outside the decedent's taxable estate. However, the rules vary significantly by state, and grantor trust status for federal income tax purposes does not automatically determine state inheritance tax treatment. Pennsylvania, in particular, requires careful analysis — the Commonwealth has its own rules for determining when a trust transfer is "complete" for inheritance tax purposes. Consult a Pennsylvania-licensed estate attorney before relying on this approach.

The Inheritance Tax Trend: States Are Phasing It Out

Iowa's 2025 repeal is part of a long-term pattern. According to the Tax Policy Center, only six states had inheritance taxes in 2022; that number fell to five with Iowa's elimination. States cite multiple reasons for repeal: concerns about capital flight (particularly of retirees and business owners), administrative complexity, and modest revenue impact relative to other taxes. Inheritance taxes typically represent a very small share of total state tax revenue — in Nebraska, for example, the inheritance tax generates roughly $30–40 million annually, less than 0.5% of total state tax collections.

Nebraska and Kentucky have both been reducing their inheritance tax exposure in recent legislative sessions. New Jersey eliminated its estate tax in 2018 but retained the inheritance tax, calculating that the inheritance tax — with its exemptions for direct family members — was more politically palatable. Pennsylvania's inheritance tax has survived multiple reform proposals but continues to face pressure from business groups and estate planning advocates.

Is Inherited Money Taxable as Income?

This question comes up constantly, and the answer is important: inherited assets are generally not taxable as ordinary income. The IRS does not treat an inheritance as income — you don't report it on Schedule B, you don't pay income tax on the value of what you received.

However, there are important exceptions:

• Inherited IRAs and retirement accounts: Distributions from inherited traditional IRAs are taxed as ordinary income when you take them. The SECURE Act 2.0 rules generally require non-spouse beneficiaries to distribute inherited IRAs within 10 years. The IRA distribution rules interact with inheritance tax in inheritance tax states, creating potential double taxation.
• Income in respect of a decedent (IRD): Income that the deceased had earned but not yet received — deferred compensation, unpaid wages, post-death interest on savings bonds — is taxable to whoever receives it, just as it would have been to the decedent.
• Capital gains on inherited assets: When you sell inherited property, you owe capital gains tax only on appreciation above your stepped-up basis (typically the fair market value at the date of death). If you inherit a stock worth $50,000 at death and sell it immediately, you have zero capital gain. See our capital gains guide for details.

The stepped-up basis rule is one of the most valuable tax benefits in the code. It effectively forgives all income tax on a lifetime of appreciation at death. For inherited real estate in inheritance tax states, heirs sometimes pay the inheritance tax and then immediately sell, recognizing zero capital gain — the inheritance tax is the only tax cost of the transfer.

Frequently Asked Questions