What Is Inheritance Tax? Definition & Basics

What Is Inheritance Tax? Definition & Basics

Let me explain inheritance tax directly: it's a levy you, as the recipient of assets from a deceased person, might have to pay on those inherited items. If you're in Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania and someone bequeaths you assets, you could be on the hook for this tax based on the value of what you receive.

Key Takeaways

You pay inheritance tax as the beneficiary on the value of what you inherit, and it's not a federal thing—it's only in certain states. Right now, that means Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Exemptions and thresholds differ by state, but they're often favorable for close family like spouses, parents, kids, or siblings.

How the Inheritance Tax Works

Whether you owe inheritance tax and how much depends on where the deceased lived or owned property—that's what sets the rules, not your own state. If they were in a state without this tax, you're off the hook. Your relationship to them matters too; most states exempt immediate family entirely or up to high amounts. The value of the inheritance is the final piece, with each state having its own generous limits, so only about 2% of folks ever pay it.

Inheritance Tax Exemptions and Thresholds

There's no federal inheritance tax, and each state handles its own exemptions. Note that Iowa phased out its tax for deaths on or after January 1, 2025. In Kentucky, immediate family like spouses, parents, children, and siblings are fully exempt; other relatives get up to $1,000 exempt with rates from 4% to 16%, and cousins or others up to $500 with 6% to 16%. Maryland exempts immediate family, grandparents, charities, and small estates under $50,000, with others exempt up to $1,000 at a 10% rate—it's the only state with both estate and inheritance taxes.

Nebraska fully exempts spouses, relatives under 22, and charities; immediate family gets $100,000 exempt then 1% over that, other relatives $40,000 exempt with 11%, and unrelated heirs $25,000 exempt with 15%. New Jersey exempts immediate family and charities, with siblings and in-laws up to $25,000, and rates from 11% to 16% based on relationship and amount. Pennsylvania exempts spouses and kids under 21 fully, with adult children, grandparents, and parents up to $3,500, at rates of 4.5%, 12%, or 15% depending on ties.

Inheritance Tax vs. Estate Tax

Don't confuse inheritance tax with estate tax—they both kick in after death but work differently. Estate tax hits the estate's total value before assets go out, paid by the estate itself. Inheritance tax, on the other hand, is on what you receive as a beneficiary, and you pay it. Both use the fair market value at death, but for a single heir, the difference might not matter much unless both taxes apply in rare cases.

Avoiding the Inheritance Tax

Most won't pay it thanks to family exemptions and thresholds, but if you have big assets in one of these states, you can minimize it for your heirs. One way is buying a life insurance policy for the amount you want to leave, naming them beneficiary—the death benefit skips inheritance tax. Another is putting assets in an irrevocable trust, removing them from your estate so they're not inheritance when you die, and you can schedule distributions upfront.

Which States Currently Charge Inheritance Tax?

As of 2025, it's Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, with Iowa phasing out. Rates run 1% to 16%, varying by your relationship and the state.

Who Is Required to File Inheritance Tax Returns?

You, as the beneficiary, usually file and pay, but in some states, the executor can handle it for you based on local rules.

The Bottom Line

If you're in Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, you might pay inheritance tax on what you inherit, but only if you're not immediate family or the amount is large. To help your own beneficiaries avoid it, look into life insurance or trusts.