What is exempt from inheritance tax depends first on geography and then on your relationship to the person who died. Only five states collect an inheritance tax at all: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.1Tax Foundation. Estate and Inheritance Taxes by State Within those five, surviving spouses pay nothing, close family members usually pay little or nothing, charitable bequests are exempt, and some assets (like life insurance paid to a named beneficiary) pass outside the tax entirely. If the person who died lived in any of the other 45 states, no state inheritance tax applies to you at all.
Where the Tax Applies at All
Inheritance tax is a state-level tax paid by the person receiving assets. It is separate from the federal estate tax, which is paid by the estate before anything reaches heirs and only kicks in for estates worth more than $15,000,000 in 2026.2Internal Revenue Service. Estate Tax Iowa used to charge an inheritance tax but eliminated it for deaths on or after January 1, 2025.1Tax Foundation. Estate and Inheritance Taxes by State
One important detail: the tax follows the deceased, not you. If your father lived in Pennsylvania and you live in Oregon, Pennsylvania’s inheritance tax can still reach what you receive. It also applies to property physically located in one of the five states, even if the deceased lived elsewhere.
Inheritance Is Not Taxable Income
Before worrying about state rules, rule out a common fear. Federal law excludes the value of property received by gift or inheritance from your gross income.3Office of the Law Revision Counsel. 26 US Code 102 – Gifts and Inheritances You do not report an inheritance on your 1040, and you owe no federal income tax on the transfer itself. Income the property generates later (rent, dividends, interest) is taxable going forward, but the inheritance is not.
Three questions get tangled: federal income tax on the inheritance (almost never owed), federal estate tax (only above $15,000,000), and state inheritance tax (only in the five states, and only if you don’t qualify for an exemption). Everything that follows is about that third question.
Surviving Spouses Pay Nothing
Every state that imposes an inheritance tax fully exempts the surviving spouse. A husband or wife can inherit any amount from their partner without owing state inheritance tax. This mirrors the federal unlimited marital deduction, which lets spouses transfer assets to each other free of estate and gift tax during life or at death.2Internal Revenue Service. Estate Tax
If you were in a domestic partnership or civil union rather than a legal marriage, the treatment varies by state. Some extend the spousal exemption; others don’t. Check the specific rules of the state where your partner was domiciled.
Close Family Members Get the Best Rates
All five inheritance tax states sort beneficiaries into classes based on relationship to the deceased. The closer the tie, the smaller the tax.1Tax Foundation. Estate and Inheritance Taxes by State
The most favorable class typically covers children, parents, grandchildren, and sometimes siblings. In some states this group is completely exempt. In others, they get large exemption thresholds (as high as $100,000) and very low rates on anything above. Many beneficiaries in this class end up owing nothing despite inheriting a substantial amount.
More distant relatives (nieces, nephews, aunts, uncles) usually fall into a middle class with smaller exemptions, roughly $1,000 to $40,000 depending on the state, and moderate rates. Unrelated individuals and friends land in the least favorable class, with exemptions as low as $500 and rates that can reach 15% or 16%. In at least one state, non-spouse heirs face inheritance tax from the first dollar with no exemption at all.1Tax Foundation. Estate and Inheritance Taxes by State
Charitable Bequests
Assets left to qualifying charitable organizations are exempt from both federal estate tax and state inheritance tax. Federal law allows the estate to deduct the full value of bequests to organizations operated for religious, charitable, scientific, literary, or educational purposes, along with gifts to government entities for public purposes and to veterans’ organizations.4Office of the Law Revision Counsel. 26 US Code 2055 – Transfers for Public, Charitable, and Religious Uses State inheritance tax laws follow a similar pattern.
The receiving organization has to genuinely qualify as tax-exempt. In practice that usually means holding federal tax-exempt status and being organized for one of the recognized purposes. During probate, documentation of the organization’s status may be required.
Assets That Pass Outside the Tax
Certain property is structured to bypass inheritance tax regardless of who inherits it.
Life insurance proceeds paid directly to a named beneficiary are the clearest example. Because the payment flows straight from the insurance company to the beneficiary under a contract, it never enters the probate estate. The IRS confirms that life insurance proceeds received as a beneficiary due to the insured person’s death generally are not includable in gross income.5Internal Revenue Service. Life Insurance and Disability Insurance Proceeds Most state inheritance tax systems treat these proceeds the same way, though the precise treatment can vary.
Jointly held property with right of survivorship passes automatically to the surviving co-owner when one owner dies. Some states exempt this transfer from inheritance tax, particularly between spouses. Joint property held between non-spouses may still be taxed depending on the jurisdiction.
Retirement accounts like 401(k)s and IRAs are more complicated. Some states exempt certain retirement benefits from inheritance tax; others include them. Either way, a beneficiary who inherits a retirement account will generally owe federal income tax on distributions. The inheritance tax question and the income tax question are separate, and the answers can point in different directions.
The Step-Up in Basis
Strictly speaking this isn’t an inheritance tax exemption, but it can save far more money than any inheritance tax costs, and it applies to every heir in every state. When you inherit property, your tax basis resets to the fair market value on the date the owner died.6Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent If your mother bought stock for $10,000 thirty years ago and it was worth $200,000 when she died, your basis is $200,000. Sell it the next week for $200,000 and your capital gain is zero.
Without the step-up, you would owe capital gains tax on the full $190,000 of appreciation that built up during her lifetime. For inherited real estate or long-held investments, this can wipe out decades of unrealized gains.6Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent If you inherit a house or brokerage account, get a professional appraisal at the date of death to lock in the new basis before you sell anything.
If You Might Owe, Move Quickly
Start with the geography check. Did the deceased live in Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, or own real property there? If not, no state inheritance tax applies. If yes, figure out which class your relationship puts you in under that state’s rules, because that drives everything.
Gather the death certificate, a copy of the will or trust, and valuations for any inherited property. State inheritance tax deadlines vary but generally track the federal estate tax return, which is due nine months after the date of death, with a six-month extension available if requested before the deadline.7Internal Revenue Service. Frequently Asked Questions on Estate Taxes At least one state offers a 5% discount for paying within three months of death, which is worth asking about early. The executor usually files the return, but the tax itself is legally the beneficiary’s obligation, so don’t assume someone else has it handled without confirming.