Who Pays Inheritance Taxes in the U.S., and When Do They Kick In?

Inheritance tax is imposed on people who have received cash, investments, or property through an inheritance. Do you have to pay taxes on inheritances in the U.S.?

Inheritance tax is different from estate tax, which is assessed on the estate itself before the assets are distributed upon the death of a person. Inheritance tax, on the other hand, is imposed on a beneficiary who receives assets.

In the U.S., there's no federal inheritance tax—this is in the hands of each state. The states with inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In 2021, Iowa passed a bill that will start phasing out its state inheritance tax, eliminating it completely for deaths occurring after Jan. 1, 2025.

The taxes depend on the state in which the decedent lived or owned property, the value of the inheritance, and the beneficiary’s relationship to the decedent. Usually, the closer the relationship, the lower the tax rates and the higher the exemptions. In the six states mentioned above, surviving spouses are exempt from inheritance tax, as are children in some cases.

One thing to keep in mind, however, is that if assets appreciate after you inherit them and you sell them, you might need to pay capital gains tax. Moreover, some types of inheritance might create taxable income (specifically, if you inherit an IRA or 401(k), the distributions you take might be taxable).

In most states, inheritance taxes kick in when the value of the inheritance crosses a particular threshold. In Iowa, if all the property of the estate has a value of less than $25,000, no tax is due. Meanwhile, Kentucky divides inheritors into three groups: Class A is exempt, Class B members get an inheritance tax exemption of $1,000, and Class C members get a $500 exemption. After that, the tax rate falls between 6 and 16 percent.

In Maryland, inheritances from estates smaller than $50,000 are also exempt, and in Nebraska, close relatives of the deceased person are given a $40,000 exemption and 1 percent tax will apply to the amount over the first $40,000.

New Jersey doesn’t levy any inheritance tax on beneficiaries in Class A (spouse and lineal ancestors and decedents) or Class E (charities and governments). There's a $25,000 exemption for amounts inherited by Class C beneficiaries (close family relatives, chiefly siblings). In Pennsylvania, spouses and minor children of the decedent are exempt. Adult children, grandparents, and parents are exempt up to $3,500.

Since inheritance tax isn't decided at the federal level, there's been no adjustment to it federally. However, the official estate and gift tax exemption limits have climbed to $12.06 million per individual from $11.7 million in 2021. The gift tax annual exclusion has jumped to $16,000 for 2022 from $15,000, allowing taxpayers to transfer a larger amount of their estate to their heirs tax-free.

There's nothing much a person who receives an inheritance can do about inheritance tax. However, people who plan to bequeath their property or investments to someone can plan so that taxes are minimized. One common element of estate planning is to give assets away before dying, as many states don’t tax gifts. Estate planning vehicles include living trusts, irrevocable trusts, and grantor retained annuity trusts.