What Is Inheritance Tax?

Inheritance tax is a tax imposed on the transfer of assets from a deceased individual to their beneficiaries. Unlike estate tax, which is levied on the total value of an estate before distribution, inheritance tax is assessed on the value of the individual beneficiary’s share. The amount due, if any, depends on several factors including the jurisdiction, the relationship of the heir to the deceased, and the value of the inherited assets. In the United States, inheritance tax is not applied at the federal level but may be levied by individual states.

How Inheritance Tax Works

Inheritance tax becomes relevant once a person dies and leaves behind money, property, or other assets to heirs. The tax is calculated based on the value of the assets received by each beneficiary. Unlike an estate tax that is typically paid by the estate before assets are distributed, inheritance tax is generally the responsibility of the person receiving the inheritance.

Each state that imposes an inheritance tax sets its own rules, exemptions, and tax rates. These rates often increase with the value of the inheritance and may vary depending on the beneficiary’s relationship to the deceased. For example, spouses and direct descendants often receive preferential treatment or full exemptions, while more distant relatives or unrelated heirs may pay higher rates.

States That Impose Inheritance Tax

As of recent years, only a handful of U.S. states impose inheritance tax. These include:

• Iowa (phased out for deaths after January 1, 2025)
• Kentucky
• Maryland (also has an estate tax)
• Nebraska
• New Jersey
• Pennsylvania

Each of these states maintains its own exemption thresholds and tax brackets. For instance, Pennsylvania exempts spouses from paying inheritance tax but imposes a 4.5% tax on transfers to direct descendants, and a 12% to 15% tax on transfers to siblings or unrelated individuals.

Exemptions and Reductions

Inheritance tax is not applied uniformly. Certain relationships often result in either a reduced tax rate or full exemption. Most states that have inheritance tax provide exemptions for:

• Spouses: In nearly all cases, spouses are exempt.
• Children and grandchildren: Many states provide exemptions or reduced rates for lineal descendants.
• Charitable organizations: Bequests made to qualified nonprofits are typically exempt.

In addition to relationship-based exemptions, states may offer value-based exclusions. For example, a beneficiary may not owe tax if the inherited amount is below a certain threshold. Each state's rules determine how exemptions apply and whether they phase out at higher values.

Inheritance Tax vs. Estate Tax

Although often confused, inheritance tax and estate tax are distinct. The estate tax is levied on the total value of a deceased person’s estate before any assets are distributed. It is typically paid out of the estate’s funds. In contrast, inheritance tax is levied after assets are distributed and paid by the recipients of those assets.

At the federal level, the United States only imposes an estate tax, and only if the estate exceeds a high exemption threshold (which was $13.99 million per individual in 2025). There is no federal inheritance tax. However, if someone inherits assets in a state that has an inheritance tax, they may still be subject to state-level taxation regardless of the federal exemption.

Tax Planning Considerations

Effective estate planning can reduce or eliminate inheritance tax liability. Some common strategies include:

• Lifetime gifting: Reducing the size of the taxable estate through annual gifts to heirs may minimize future inheritance tax burdens.
• Trusts: Certain types of trusts can help control how assets are distributed and shield beneficiaries from high tax exposure.
• Residency planning: Since inheritance tax is a state-level concern, some individuals consider moving to a state without such a tax to protect their heirs from this expense.

Legal and tax professionals can help structure an estate in a way that aligns with the individual's goals while minimizing the tax impact on beneficiaries.

International Context

Inheritance tax is more common in other parts of the world, particularly in Europe and parts of Asia. Countries such as the United Kingdom, Germany, and Japan impose inheritance or succession taxes at varying rates. In many cases, international rules can be more stringent than those found in the United States, particularly for non-relatives or high-value estates. For U.S. citizens who inherit property abroad—or foreign nationals who inherit U.S. assets—the tax implications can become complex and may involve coordination between multiple jurisdictions.

The Bottom Line

Inheritance tax is a state-level tax applied to beneficiaries receiving assets from a deceased person, and its impact depends largely on where the deceased lived and the relationship of the heir. While most states do not impose inheritance tax, those that do apply different rules and rates. Understanding these differences, and planning accordingly, can help ensure a more efficient transfer of wealth and reduce the tax burden for heirs. Careful planning, especially with the help of legal and financial professionals, can make a significant difference in how an inheritance is received and taxed.