Inheritance tax vs. estate tax comes down to who writes the check. An estate tax is paid by the estate of the person who died, before any assets are distributed. An inheritance tax is paid by each individual heir on what they personally receive. At the federal level only the estate tax exists, and it exempts the first $15 million per person, so it touches almost no one. Inheritance taxes exist in just five states, and the rate an heir pays depends on how closely related they were to the deceased.
Who Actually Pays
The federal estate tax is a tax on the right to transfer property at death.1Internal Revenue Service. Estate Tax The executor totals up what the deceased owned, pays any tax out of estate funds, and then distributes what’s left. From the heir’s point of view, the money that arrives has already been taxed. They don’t file anything and don’t owe anything extra on account of it.
An inheritance tax runs the other direction. The state taxes each heir on the portion they receive. The heir is the one who reports and pays, either from the inherited assets or out of their own pocket. Because the tax is tied to the recipient, the rate and any exemption can shift based on who that recipient is. An estate tax doesn’t work that way; a spouse and a stranger inheriting equal shares of a taxable estate face the same estate tax calculation, because the tax was already paid on the total.
The Federal Rules: Estate Tax Only
There is no federal inheritance tax. No federal law requires beneficiaries to pay income or transfer tax on property they receive from a deceased person’s estate. Federal exposure is entirely the estate’s problem.
For 2026, the federal estate tax exempts the first $15 million per individual.2Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax A married couple can shield up to $30 million between them when both exemptions are used. Starting in 2027, the figure will be adjusted annually for inflation.3Internal Revenue Service. What’s New – Estate and Gift Tax
Amounts above the exemption are taxed on a graduated scale that starts at 18 percent and reaches a top rate of 40 percent on the portion more than $1 million over the exemption.4Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax Because the unified credit absorbs the tax on the first $15 million, only the slice above the exemption actually generates a bill. The vast majority of estates owe nothing federally.
Two Deductions That Can Wipe Out a Federal Bill
Even estates above $15 million can reduce or eliminate their federal tax through two deductions with no dollar cap.
The marital deduction lets the estate deduct the full value of anything passing to a surviving spouse who is a U.S. citizen. A person could leave a $50 million estate entirely to their spouse and owe no federal estate tax. The deduction does not apply when the surviving spouse is not a U.S. citizen unless the assets pass through a qualified domestic trust, which ensures the tax is eventually collected.5Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
The charitable deduction works the same way for property left to qualifying charities, government entities, and certain nonprofits.6Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses Between the two, an estate worth well above the exemption can still owe nothing if everything goes to a spouse or charity.
Which States Impose an Estate Tax
About a dozen states and the District of Columbia impose their own estate tax on top of the federal system. The structure mirrors the federal one, with the estate paying before distribution, but the thresholds are far lower. State exemptions run from $1 million to roughly $14 million, and the most common range is $2 million to $7 million. That means an estate that owes nothing federally can still face a real state bill.
State rates also vary, but most top out between 12 and 20 percent. For a family in a state with a $2 million exemption and a 16 percent top rate, the state tax is usually the more relevant concern than the federal one.
Which States Impose an Inheritance Tax
Only five states currently impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa eliminated its inheritance tax effective January 1, 2025. Maryland is the only state that imposes both an estate tax and an inheritance tax, so the estate pays one tax on the total and each heir may owe a separate tax on their share.
In every state that has one, the rate turns on the relationship between the deceased and the heir. Closer family pays less. The pattern across the five states:
- Spouses are exempt in all five states.
- Children and parents are either fully exempt or taxed at a low rate. Pennsylvania charges 4.5 percent on transfers to direct descendants; Nebraska and others exempt close family entirely or apply a 1 percent rate after a generous threshold.
- Siblings are taxed at moderate rates, commonly 4 to 12 percent.
- Unrelated heirs face the highest rates, reaching 15 to 16 percent in several states, sometimes with little or no exemption.
Exemption amounts also vary widely, from none in Pennsylvania for non-spouse heirs up to $100,000 in Nebraska for immediate family. The practical takeaway is straightforward. Inherit from a spouse or parent in one of these five states and you’ll likely owe nothing. Inherit from a friend or distant relative and you could owe a meaningful percentage of what arrives. Check your state’s specific schedule before assuming.
Portability: Don’t Lose the First Spouse’s Exemption
When the first spouse dies, any unused portion of their $15 million exemption can be transferred to the surviving spouse. The executor makes this election, called portability, by filing Form 706 for the deceased spouse’s estate, even if the estate is otherwise too small to require a return.7Internal Revenue Service. Instructions for Form 706
The return is generally due within nine months of death, with an available six-month extension. For estates that weren’t required to file but missed the deadline, a special relief provision allows the portability election to be made up to five years after the date of death, with the return noting that it’s filed under Rev. Proc. 2022-32.7Internal Revenue Service. Instructions for Form 706
This is where families most often leave money on the table. The first spouse dies with a modest estate, the surviving family assumes no filing is needed, and years later, when the second spouse dies with a larger estate, the first spouse’s unused exemption is gone. For any couple whose combined assets could eventually approach the exemption, filing for portability at the first death is cheap insurance.
Filing Deadlines and Late Penalties
The federal estate tax return (Form 706) is due nine months after the date of death.7Internal Revenue Service. Instructions for Form 706 Executors can request an automatic six-month extension to file by submitting Form 4768 before the original due date.8eCFR. 26 CFR 20.6081-1 – Extension of Time for Filing the Return That extension covers filing only. It does not extend the deadline to pay, and interest begins running on any unpaid balance after nine months whether or not an extension was granted.
Missing the deadline is expensive. The late-filing penalty is 5 percent of the unpaid tax per month (or partial month), capping at 25 percent. The late-payment penalty is 0.5 percent per month, also capping at 25 percent.9Office of the Law Revision Counsel. 26 US Code 6651 – Failure to File Tax Return or to Pay Tax When both run at once, the filing penalty is reduced by the payment penalty, so the combined maximum is 5 percent per month rather than 5.5 percent. A separate 20 percent penalty applies to underpayments caused by negligence or substantial undervaluation, a common issue with aggressive appraisals of real estate, business interests, or art.7Internal Revenue Service. Instructions for Form 706
State inheritance and estate tax deadlines vary but generally follow a similar pattern: returns due within several months of death, with late-filing and late-payment penalties on top of interest.