An inheritance tax is a state tax paid by the person receiving property from someone who died, calculated on the value of that specific bequest and the beneficiary’s relationship to the deceased. Only five states charge one: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Spouses are exempt in all five, close family members typically pay little or nothing, and distant relatives or unrelated heirs can face rates as high as 16 percent. There is no federal inheritance tax.
How It Differs From Estate Tax
The two taxes hit different pockets. An estate tax is calculated on the total value of everything the deceased owned, and the estate pays the bill before anything is distributed. The federal estate tax applies only to estates exceeding $15,000,000 for deaths in 2026, a threshold raised by the One, Big, Beautiful Bill signed into law on July 4, 2025.1Internal Revenue Service. What’s New – Estate and Gift Tax Very few families owe anything to the federal government at that level.
Inheritance tax works the other way around. It falls on the person receiving the property, and the amount owed depends on how much that person received and how they were related to the deceased. You could inherit from an estate that owes nothing in federal estate tax and still face a state inheritance bill. Maryland is the only state that imposes both a state estate tax and an inheritance tax, so heirs there can be taxed twice on the same transfer.2Tax Foundation. Estate and Inheritance Taxes by State
Which State’s Rules Apply
The tax is owed to the state where the deceased lived, not where the beneficiary lives. If your uncle was a Pennsylvania resident and you live in Florida, you owe Pennsylvania inheritance tax on what you receive. The same principle picks up taxable property located inside an inheritance-tax state even when the deceased lived elsewhere. Real estate in New Jersey, for example, can trigger New Jersey inheritance tax regardless of the owner’s domicile at death.2Tax Foundation. Estate and Inheritance Taxes by State
Rates and Exemptions in Each State
Every inheritance-tax state sorts beneficiaries into classes based on their relationship to the deceased, then applies different rates and exemptions to each class. Spouses are exempt everywhere. After that, the rules diverge.
Kentucky
Kentucky uses three classes. Class A (surviving spouse, parents, children, grandchildren, and siblings) is completely exempt. Class B (nieces, nephews, aunts, uncles, in-laws, and great-grandchildren) gets a $1,000 exemption and faces rates from 4 to 16 percent. Class C (everyone else, including cousins and unrelated individuals) has a $500 exemption and rates from 6 to 16 percent.3Kentucky Department of Revenue. Inheritance Tax
Maryland
Maryland charges a flat 10 percent on anyone who isn’t exempt. The exempt list covers spouses, parents, grandparents, children, grandchildren, stepchildren, siblings, and the spouses of a decedent’s children. Registered domestic partners are also exempt for deaths on or after October 1, 2023. The 10 percent rate applies to everyone else, including nieces, nephews, cousins, aunts, uncles, friends, and unrelated heirs.4Maryland Register of Wills. Inheritance Tax
Nebraska
Nebraska overhauled its inheritance tax through LB1067, phasing rates down over several years. For deaths in 2026, immediate family (children, parents, grandchildren, and siblings) pay 0.50 percent on amounts above $100,000. Aunts, uncles, nieces, and nephews pay 3 percent on amounts above $40,000. Everyone else pays 3 percent on amounts above $25,000.5Nebraska Legislature. LB1067 Committee Statement Surviving spouses are fully exempt. Distant heirs previously faced rates as high as 15 percent, so the 2026 numbers are a significant reduction.
New Jersey
New Jersey exempts the widest set of close relatives. Class A beneficiaries (spouses, children, grandchildren, parents, grandparents, and stepchildren) owe nothing regardless of the amount inherited. Class C (siblings and in-laws of the decedent’s children) gets a $25,000 exemption and then pays graduated rates from 11 to 16 percent. Class D covers everyone else at 15 percent on the first $700,000 and 16 percent above that, with no exemption.6New Jersey Division of Taxation. General Information – Inheritance and Estate Tax A friend left $500,000 in New Jersey owes $75,000 before receiving anything.
Pennsylvania
Pennsylvania applies flat rates that depend only on relationship. Surviving spouses, and parents inheriting from a child aged 21 or younger, pay nothing. Direct descendants and lineal heirs pay 4.5 percent on the full amount. Siblings pay 12 percent. All other heirs pay 15 percent.7Pennsylvania Department of Revenue. Inheritance Tax Property owned jointly between spouses is also exempt. Pennsylvania offers a 5 percent discount on the tax bill if payment is made within three months of death.
What Property Is Taxed
Inheritance tax generally applies to any asset the deceased owned or had an interest in at death: bank accounts, investment portfolios, real estate, vehicles, business interests, and personal property like jewelry or collectibles. Retirement accounts such as IRAs and 401(k)s are usually included, even though they pass by beneficiary designation rather than through a will.
Life insurance is a common exception. Maryland explicitly exempts life insurance benefits payable to a named beneficiary other than the estate.4Maryland Register of Wills. Inheritance Tax Pennsylvania exempts certain agricultural land transferred to eligible recipients. The specifics vary, so checking your state’s revenue department for the full exempt list is worth the effort before filing.
How Assets Are Valued
The tax is calculated on the fair market value of each asset at the date of death. Bank accounts use the balance on that date. Publicly traded securities use the closing price. Real estate and personal property typically require a professional appraisal, and most states accept a certified appraisal conducted close to the date of death.
Closely held business interests and private company stock are the hardest assets to value and the most common source of disputes with state tax authorities. Appraisers weigh earnings history, book value, dividend-paying capacity, and the pricing of comparable public companies. For investment or holding companies, underlying asset values carry more weight; for operating businesses, earning capacity tends to dominate.
Outstanding debts owed by the deceased, including mortgages, medical bills, and credit card balances, reduce the taxable amount. Funeral and burial expenses are also deductible in most states. Clean records of these costs simplify the filing and lower the final bill.
Filing, Deadlines, and Penalties
Filing the return is the responsibility of the beneficiary, the executor, or both, depending on the state. Before touching any forms, gather:
- Social Security numbers for the deceased and every beneficiary, along with the exact date of death.
- A full asset inventory: financial accounts, real estate, vehicles, business interests, and valuable personal property.
- Valuations: date-of-death bank statements, brokerage account values, real estate appraisals, and any business valuations.
- Documentation of outstanding loans, medical bills, credit card balances, and funeral costs that reduce the taxable amount.
- Estate planning documents: the will, any trust agreements, and beneficiary designation forms for retirement accounts and life insurance.
Each state provides its own inheritance tax return through its department of revenue. Pennsylvania uses Form REV-1500 for resident decedents. New Jersey uses Form IT-R for resident estates. The forms have you enter values into schedules for different asset categories, then apply the correct rate based on each beneficiary’s relationship class. Most states accept returns by mail, and some now offer electronic filing.
Most inheritance-tax states require filing within nine months of the date of death, aligning with the federal estate tax deadline.8Office of the Law Revision Counsel. 26 USC 6075 – Time for Filing Estate and Gift Tax Returns Nebraska gives beneficiaries twelve months. A common late-filing penalty is 5 percent of the unpaid tax per month, capped at 25 percent, with interest on top. Nebraska charges 14 percent annual interest on overdue balances. Between penalties and interest, a bill can grow by a third or more within a year.
Pennsylvania’s 5 percent early-payment discount cuts the other direction. On a $500,000 inheritance taxed at 4.5 percent, paying within three months saves $1,125.7Pennsylvania Department of Revenue. Inheritance Tax If the estate has liquid assets available early, taking the discount is straightforward money.
When estate assets are tied up in property that can’t be sold quickly, a reasonable-cause extension can push the payment deadline out by up to 12 months, and an undue-hardship extension can stretch payments over as long as 10 years. Interest continues to accrue during any extension.9eCFR. 26 CFR 20.6161-1 – Extension of Time for Paying Tax Shown on the Return
Ways to Reduce Inheritance Tax
The simplest strategy is giving assets away during life. Most inheritance-tax states tax only what passes at death, not lifetime gifts, so transferring assets to family members over several years moves wealth out of the taxable estate. The federal annual gift tax exclusion allows substantial tax-free giving each year, and gifts within that exclusion generally don’t trigger state-level tax either.
Beneficiary designations on life insurance, retirement accounts, and payable-on-death bank accounts can help as well. In Maryland, life insurance proceeds paid to a named beneficiary are exempt.4Maryland Register of Wills. Inheritance Tax Routing assets through these designations rather than through the probate estate can shrink the taxable base.
Irrevocable trusts are another tool with real trade-offs. Transferring property into an irrevocable trust removes it from your estate, but you also give up control permanently. The trust becomes the legal owner, and depending on state law, property in certain trusts may not be subject to inheritance tax when you die. This approach fits high-value assets and needs an estate planning attorney to set up correctly.
For married couples, the universal spousal exemption already eliminates tax on the first death. The planning challenge is the second death, when children or other heirs inherit. Structuring ownership so more assets pass to the surviving spouse first, then are gifted or spent down over time, can reduce what remains in the taxable estate at the second death. The right mix depends on the size of the estate, the types of assets, and who the beneficiaries are.