What Is an Inheritance Tax and Do I Have to Pay It?
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Key Takeaways
- An inheritance tax is a state tax (not a federal tax) paid by the person receiving the inheritance.
- Only five states collect an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
- Whether you owe depends on where the deceased lived or owned property, how closely related you were to them, and the value of the inheritance.
- Spouses are exempt from inheritance tax in all five states that collect it.
- There’s no federal inheritance tax. Instead, there’s a federal estate tax on estates worth more than $15 million.1
Lots of people have a beloved “Aunt Edna” character in their life—you know, the kind of person who always says you’re her favorite and has an enormous collection of Precious Moments figurines.
Eventually, though, even Aunt Edna passes away. She leaves behind a legacy—and maybe an inheritance too. For example, maybe she leaves you a check for $10,000 (and a bunch of figurines). At some point, you’re going to need to find out if you’re on the hook for inheritance tax.
Here's a Tip
Whether you’ll pay an inheritance tax depends on where the deceased lived or owned property—and your relationship to them (if you’re related, you may be exempt). You only need to worry about an inheritance tax if the deceased lived or owned property in Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania.
Why is it important to know the tax implications of giving away money or an inheritance? Well, whether you're leaving an inheritance or getting one, you don't want taxes to catch you by surprise. Understanding how inheritance tax works can help you avoid costly mistakes and make informed decisions about your money.
What Is an Inheritance Tax?
An inheritance tax is a state tax you pay on property or money you receive from someone who has passed away. Don’t confuse the inheritance tax with the federal estate tax, which kicks in for estates worth more than $15 million.2 We’ll cover estate taxes a little later.
Once upon a time, all 50 states had an inheritance tax. Over the years, though, more states have dropped theirs (most recently Iowa in 2025.) Today, only five states still have one: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
Your odds of getting hit with an inheritance tax depend on three main things:
- Your relationship to the person who passed away
- What state that person owned property or lived in
- How much the inheritance is worth
Who Pays Inheritance Tax?
The person who inherits pays inheritance tax.
If the person who died (the deceased) lived in one of the five states mentioned above, you might be on the hook for inheritance tax—no matter where you live. But your relationship to the deceased is a major factor.
Spouses are exempt from inheritance tax in all five states that collect one. Exemptions for parents, children and other relatives vary by state.3
And if the person who died lived in any of the 45 states that don’t have an inheritance tax, you’ll probably collect your inheritance tax-free—even if you live in one of the five states that do.
How Do Inheritance Taxes Work?
Inheritance tax is triggered based on where the deceased lived or owned property, not where you live. If inheritance tax applies, your relationship to that person and the size of your inheritance determine whether you owe anything, and how much.
The best way to explain this is with a couple of examples, so let’s dig in.
Let’s say your father-in-law from Tennessee, a state without an inheritance tax, leaves you $50,000. Even though you live in New Jersey, which does have an inheritance tax, you won’t pay inheritance tax. That’s because your father-in-law lived in Tennessee, not New Jersey.4
On the other hand, let’s say your father-in-law lived in New Jersey when he left you that same $50,000. Because the tax exemption amount for children-in-law is $25,000 in New Jersey, you’d pay an inheritance tax of 11% on $25,000 ($50,000 - $25,000) when it passes to you.5
Not only is it complicated but each state is different, and taxes can change. It’s a good idea to check tax laws in the applicable state—or better yet, talk to a tax pro!
Here's a Tip
Uncle Sam doesn’t have an inheritance tax. Also, inheritances aren’t considered taxable income in most cases—so you may not have to report your inheritance on your state or federal income tax return.
What Are Inheritance Tax Rates by State?
Tax rates and laws are different in each state. Rates are generally based on how closely related the inheritor is to the deceased. The more distantly related you are and the higher the inheritance amount, the higher your tax rate.
Inheritance Tax Rates by State
|
State |
Rate |
|
Kentucky |
4–16%6 |
|
Maryland |
10%7 |
|
Nebraska |
|
|
New Jersey |
11–16%11 |
|
Pennsylvania |
4.5–15%12 |
Remember from our example above that in New Jersey, the tax exemption amount for children-in-law is $25,000. You wouldn’t pay an inheritance tax on any amount below that. But any amount over that, up to $1.075 million, will get hit with an 11% tax.13
And like we said, tax rules often change. For example, in Iowa, the inheritance tax was repealed on January 1, 2025.
If all this sounds more than a little confusing, a RamseyTrusted® tax pro can help you figure out inheritance taxes (and much more). Even better, they’re vetted by Ramsey.
What About Retirement Accounts and Real Estate?
If you inherit a retirement account (like a 401(k) or a traditional IRA) you may have to pay income tax on it. Retirement accounts like these can get tricky, and distributions (the amount of money you take out of them) are typically taxable if they’re not Roth plans.
Inherited Roth accounts work a little differently. If you inherit a Roth IRA, that money was already taxed when it was invested, so your withdrawals are typically tax-free. A Roth 401(k) employer match isn’t so simple though. The portion from the original owner’s contributions and growth will come to you tax-free, but non-Roth employer matches get taxed like a traditional 401(k) when you withdraw the money.
Now let’s talk real estate. If you inherit a piece of property and then sell it, you may have to pay a capital gains tax. In other words, if you make a profit because the property sells for more than it was valued at when you inherited it, you may be taxed on the difference.
There’s no stress like IRS stress.
Get the tax man off your back by putting a pro in your corner. They can help you find a clear path through the chaos.
What’s the Difference Between Inheritance Tax and Estate Tax?
It’s pretty simple: The estate is responsible for paying the estate tax. The person inheriting is responsible for paying the inheritance tax.
Here's a Tip
The federal estate tax exemption was permanently raised to $15 million per person by the One Big Beautiful Bill Act (OBBBA), which became law on July 4, 2025.14
Now let’s go a little deeper. Estate taxes (and debts owed) are collected from the estate before any assets are paid out. Depending on where the estate is located and how much it’s worth, it could be subject to federal and state estate taxes.
The federal estate tax is only assessed on estates worth more than $15 million per person (which means $30 million for married couples).15 That’s such a big threshold that very few people will ever have to deal with the federal estate tax. But if you do inherit a multimillion-dollar estate, that estate will pay taxes ranging from 18% up to 40% on any amount above the exclusion.16
The following 12 states (plus the District of Columbia) impose a state estate tax, and their exemption thresholds are generally much lower than the federal limit.
States With an Estate Tax
|
State |
Estate Tax Exemption |
Estate Tax Rate |
|
Connecticut |
$13,990,000 |
12% |
|
Hawaii |
$5,490,000 |
10–20% |
|
Illinois |
$4,000,000 |
0.8–16% |
|
Maine |
$7,000,000 |
8–12% |
|
Maryland |
$5,000,000 |
0.8–16% |
|
Massachusetts |
$2,000,000 |
0.8–16% |
|
Minnesota |
$3,000,000 |
13–16% |
|
New York |
$7,160,000 |
3.06–16% |
|
Oregon |
$1,000,000 |
10–16% |
|
Rhode Island |
$1,802,431 |
0.8–16% |
|
Vermont |
$5,000,000 |
16% |
|
Washington |
$3,000,000 |
10–35% |
|
District of Columbia |
$4,873,200 |
11.2–16%17 |
Unlike estate tax, inheritance tax is based on the value of the assets you inherit from someone’s estate. This means that you—the person inheriting—would be responsible for paying up if you aren’t exempt.
What Are Inheritance Tax Exemptions?
Inheritance tax exemptions are just rules that allow the beneficiary to receive assets from a deceased person without paying state taxes on that money.
For example, if your spouse dies, you as the surviving spouse won’t have to pay the inheritance tax in any of the states that collect it. Spouses are exempt.
The inheritance tax also doesn’t apply if the deceased gave you money before they died. Receiving it as a gift not only benefits you but also reduces the value of the deceased’s estate.
Most states (with the exception of Connecticut) don’t tax gifts, but the federal gift tax threshold is $19,000 per person per year.18,19 So, if it’s under that amount, the gift is tax-free (the giver usually pays any applicable gift tax).
Find a Tax Pro Near You
Just as you shouldn’t grieve a loved one alone, you shouldn’t have to figure out inheritance taxes by yourself either. That’s true whether you’re feeling overwhelmed by the tax rules or considering investing your inheritance (which is a great idea if you’re debt-free!).
We can match you with a tax pro, and they can walk you through your options. Ready for some peace of mind about your taxes?
Next Steps
- Learn what you need to do when a loved one dies: Use our checklist to make sure you’re ready for life’s hardest moments.
- Find out what could happen if you or a loved one were to die without a will.
- Learn what to do when you inherit retirement accounts, cash and more.
- Talk to a tax pro. Inheritance tax law is state-specific and can change. A RamseyTrusted tax professional can walk you through exactly what you owe (if anything!).
Frequently Asked Questions
-
Can you refuse an inheritance to avoid paying tax on it?
-
Yes. Legally, this is called a qualified disclaimer, and it’s a formal legal process (don’t just ignore the check you get!). You have to act within nine months of the death, and once you disclaim, it’s irreversible. Also, you don’t get to redirect it to someone else—it passes through to whoever is legally next in line. Disclaiming may protect you from certain taxes, but we recommend talking to a pro about your specific situation.
-
Is there a deadline to pay inheritance tax?
-
Yes, but it varies by state. Pennsylvania gives you nine months, Kentucky gives 18 months, and Nebraska gives 12. Miss the deadline and you're looking at interest and penalties, so don’t sit on this one.1
-
Can you owe inheritance tax on life insurance money?
-
Not usually. Most states with an inheritance tax treat life insurance proceeds as exempt when there’s a named beneficiary. If the policy pays out to an estate instead of a person, you could owe taxes.
-
What if you can’t afford to pay the inheritance tax before the deadline?
-
Talk to a tax pro about your options before the deadline hits. Some states allow extensions, and in some cases the tax can be paid from the inherited assets rather than out of your pocket.1
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