Inheritance tax: How it works, and how it differs from estate tax

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Published on November 22, 2024 | 4 min read

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What is the inheritance tax?

An inheritance tax is levied when a beneficiary inherits assets from the estate of someone who died.

While the federal government doesn’t impose an inheritance tax, six states do: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. (Iowa passed a law that abolishes its inheritance tax after 2024.)

The federal government does levy an estate tax, as do 12 states and Washington, D.C. Maryland is currently the only state to assess both an estate and inheritance tax.

Unlike an estate tax, which is paid by the estate before the assets are distributed, an inheritance tax is paid by the beneficiary on the asset’s value. The tax is levied if the person who died lived in a state that has an inheritance tax, even if the beneficiary lives in a state without an inheritance tax.

How inheritance tax works

In states with an inheritance tax, beneficiaries pay a tax on the value of their inheritance. Generally, the inheritance tax is a progressive tax, which means the tax rate increases with the value of the bequest. Some states assess different tax rates depending on the asset received, or the beneficiary’s relationship to the person who died. Close relatives may be exempt from the inheritance tax, or may pay a lower rate. State laws vary and are subject to change.

In 2024, the inheritance tax rate among the six states ranged from 0 to 16 percent, with New Jersey and Kentucky having the highest top tax rate.

Some states, including Kentucky, Nebraska and New Jersey and Maryland offer an inheritance tax exemption, which allows the beneficiary to avoid the inheritance tax if the asset’s value is less than the exemption amount.

For example, Maryland offers an inheritance tax exemption for property of less than $1,000. Maryland also exempts surviving spouses, children, grandchildren, great-grandchildren, parents and grandparents from paying an inheritance tax.

States that have an inheritance tax

In 2024, six states imposed an inheritance tax:

Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania

Inheritance tax rates range from a high of 16 percent in Kentucky and New Jersey to a low of 2 percent in Iowa. However, Iowa has abolished its inheritance tax, starting in 2025; beneficiaries won’t pay inheritance taxes in Iowa beginning Jan. 1, 2025.

Inheritance tax vs. estate tax

It’s easy to confuse the inheritance tax with the estate tax, but the two are quite different. The inheritance tax is imposed on the individual who inherits assets from someone else. An estate tax is imposed directly on the decedent’s estate before the assets are distributed to beneficiaries.

The federal government imposes an estate tax of 18 to 40 percent on assets above a specific exemption amount. That amount is $13.6 million in 2024, and almost $14 million in 2025.

In addition to the federal government, 12 states and the District of Columbia charge a state estate tax. For this reason, some estates pay both a federal and state estate tax. Like the federal government, states that have an estate tax generally offer an exemption amount. In 2024, state estate tax exemption amounts ranged from $1 million in Oregon to $13.6 million in Connecticut, according to the Tax Foundation.

In addition to the District of Columbia, these 12 states impose an estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.

How to avoid or reduce inheritance taxes

While beneficiaries have limited options for reducing taxes after receiving an inheritance, they should research whether they qualify for any exemptions that would help them reduce or avoid the tax altogether.

However, those who plan to leave an inheritance to loved ones should consider the following strategies to reduce or avoid inheritance tax for their beneficiaries.

Take advantage of the annual gift tax exclusion, which allows you to transfer wealth while you’re still alive, without paying taxes. For 2025, the annual gift tax exclusion is $19,000 per recipient (up from $18,000 in 2024). In 2025, individuals can gift $19,000 to as many people as they choose without triggering a gift tax. If you’re married, each spouse can gift $19,000. For example, in 2025, a couple with four children can gift a total of $152,000 to their children ($19,000 per spouse to each child) without triggering taxes. If you exceed that annual limit for any one beneficiary, or if you’re making gifts with your spouse, it’s likely you’ll need to file a gift tax return, Form 709, with your Form 1040. (Married couples, especially, should consider consulting with a tax professional when employing a “gift splitting” strategy.)
Another way to avoid the inheritance tax is to choose to reside (or own property) in a state that doesn’t impose the tax. Currently, six states impose an inheritance tax, though Iowa has abolished the inheritance tax after 2024. Choosing to forego these states means you’re helping your beneficiaries avoid the inheritance tax altogether. (Inheritance tax is levied based upon where the decedent lived.)
Meeting with an estate professional to create a plan to eliminate or reduce inheritance tax or estate tax is wise. Making a plan before the unthinkable can remove a heavy burden at the time of death.