How inheritance tax works
An inheritance tax is charged on each beneficiary’s share of an estate, not on the estate as a whole. Every heir falls into a class set by their relationship to the person who died, and each class has its own exemption and rate: close family pays little or nothing, while more distant relatives and unrelated friends pay the most. Shares are generally figured after the estate’s debts, funeral costs and administration expenses.
Where the heir lives doesn’t matter. The tax belongs mainly to the state where the deceased person lived, which taxes their bank and investment accounts wherever they are held, plus any state where they owned real estate or other physical property. New Jersey and Kentucky, for example, tax a nonresident’s estate only on real estate and tangible property located in the state.
The tax generally reaches property that passes outside a Will as well, such as joint accounts and beneficiary designations, with carve-outs such as life insurance in some states.
Which states have an inheritance tax in 2026, and at what rates?
Five states levy an inheritance tax for deaths in 2026, and Maryland is the only one that also has a state estate tax. Iowa repealed its inheritance tax for deaths on or after January 1, 2025, and New Jersey ended its estate tax in 2018 but kept its inheritance tax. Deadlines differ: New Jersey wants the return and payment within eight months of death, Pennsylvania’s tax becomes delinquent after nine months, and Kentucky allows 18 months to file but takes 5% off tax paid within nine.
- Pennsylvania: 0% to a spouse, and to a parent inheriting from a child 21 or younger; 4.5% to children, grandchildren and other lineal heirs; 12% to siblings; 15% to everyone else. Tax paid within three months of death earns a 5% discount.
- New Jersey: spouses, children, grandchildren, parents and stepchildren are exempt. Siblings and a child’s spouse pay nothing on the first $25,000, then 11%–16%. Other heirs pay 15% on the first $700,000 and 16% above.
- Kentucky: spouses, parents, children, grandchildren and siblings are exempt. Nieces, nephews, in-laws, aunts and uncles pay 4%–16% after a $1,000 exemption; everyone else pays 6%–16% after $500.
- Nebraska: close relatives, including children and siblings, pay 1% above $100,000 each; aunts, uncles, nieces and nephews pay 11% above $40,000; others pay 15% above $25,000. Spouses and heirs under 22 are exempt.
- Maryland: a flat 10%, but spouses, children and other lineal descendants, parents, grandparents and siblings are exempt, as is any heir’s share of $1,000 or less.
Inheritance tax vs. estate tax and income tax
An estate tax is charged on the whole estate before anything is distributed, with one large exemption. The federal version exempts $15,000,000 per person in 2026 and taxes the excess at up to 40%, so it reaches very few families. An inheritance tax works the other way round: small or no exemptions, applied heir by heir, with rates set by family ties rather than wealth, so a modest estate can still owe thousands. Both are one-time taxes at death, unlike a wealth tax, which is charged every year.
The taxes overlap at the edges. An estate large enough to owe federal estate tax can deduct any state inheritance or estate tax it actually paid. Kentucky also reaches gifts made within three years of death in contemplation of it, while federal rules handle lifetime giving through the gift tax.
Income tax is a separate question. Inheritances generally aren’t income to the heir, and most inherited investments and homes get a step-up in basis to their value at death. Pre-tax retirement money is the exception: withdrawals from an inherited IRA are ordinary income, usually taken within ten years under the 10-year rule.
How UK Inheritance Tax differs
In the United Kingdom, Inheritance Tax is the name for what Americans would call an estate tax. It is charged on the estate as a whole, the executors pay it, and beneficiaries don’t normally pay tax on what they receive. The standard rate is 40% on the part of an estate above the £325,000 threshold, or 36% if at least 10% of the net estate goes to charity. Everything left to a spouse, civil partner or charity is normally exempt. The other main rules:
- A home left to children or grandchildren, including adopted, foster and stepchildren, can raise the threshold to £500,000, though that extra allowance shrinks by £1 for every £2 an estate is worth above £2 million.
- A surviving spouse or civil partner inherits any unused threshold, so a couple can pass on up to £1 million without tax.
- Recipients of lifetime gifts may owe tax only if the giver gave away more than £325,000 and died within seven years.
- The tax is due by the end of the sixth month after death, with interest charged after that.
- The thresholds are fixed through the 2030/31 tax year, and from 6 April 2027 most unused pension funds, such as a SIPP, count toward the estate.
How to reduce inheritance tax, and mistakes to avoid
Because rates turn on relationships, the biggest lever is who receives what. Charitable bequests are generally exempt in Pennsylvania, New Jersey and Kentucky, so money meant for good causes goes further left straight to charity, perhaps through a donor-advised fund, than left to a taxed heir who gives it away later. Life insurance paid to a named beneficiary is exempt in several of the five states, and where the deceased lived decides which state’s rules apply, so a move late in life can change the bill. The errors that cost heirs most are simpler:
- Assuming the heir’s own state decides. A Florida heir of a Pennsylvania parent still owes Pennsylvania tax, while a Pennsylvania heir of a Florida parent generally owes none, apart from tax on Pennsylvania real estate.
- Thinking a revocable living trust or payable-on-death account avoids it. Those skip Probate, not the tax.
- Missing the discounts: 5% for paying within three months in Pennsylvania, or within nine months in Kentucky.
Illustrative numbers
A Pennsylvania resident leaves a $900,000 net estate to three heirs
- Heir’s share
- The net value that heir receives, generally after the estate’s debts and expenses
- Exemption
- The tax-free amount for that class, such as $25,000 for a New Jersey sibling or $0 for a Pennsylvania child
- Rate
- Flat in Pennsylvania, Nebraska and Maryland; graduated in New Jersey and Kentucky
Each heir is figured separately, and a spouse’s share is exempt in every state that levies the tax.
Adult daughter: $400,000 × 4.5%$18,000
Brother: $300,000 × 12%$36,000
Friend: $200,000 × 15%$30,000
Total Pennsylvania inheritance tax$84,000
Paid within three months of death (5% discount)$79,800
Paid early, the tax leaves $820,200 for the three heirs. Had the deceased lived in New Jersey, the total would be $60,250, with nothing owed by the daughter; in Maryland, $20,000. None of it is federal, since the estate is far below the $15,000,000 exemption.
At a glance
Inheritance tax on the same three bequests, by the deceased’s state (deaths in 2026, before discounts)
| State | Adult child, $400,000 | Sibling, $300,000 | Friend, $200,000 | Total |
|---|---|---|---|---|
| Pennsylvania | $18,000 | $36,000 | $30,000 | $84,000 |
| New Jersey | $0 | $30,250 | $30,000 | $60,250 |
| Nebraska | $3,000 | $2,000 | $26,250 | $31,250 |
| Kentucky | $0 | $0 | $28,670 | $28,670 |
| Maryland | $0 | $0 | $20,000 | $20,000 |
| Any other state | $0 | $0 | $0 | $0 |
Put it in your plan
Inheritance Tax in MoneyWhatIf
MoneyWhatIf’s Estate page follows the plan’s final year through debts, beneficiary income tax on inherited pre-tax money, property selling costs, charitable giving, administration costs, the estate tax of the state you select, and the federal estate tax. It doesn’t charge the inheritance taxes of Pennsylvania, New Jersey, Kentucky, Nebraska or Maryland, or model each beneficiary’s own tax situation. As a rough stand-in, raise the administration-costs assumption, which goes up to 10%, by the blended rate your heirs would pay across the estate. Like the page’s other assumptions, it isn’t saved with the plan.
Common questions
Inheritance Tax FAQs
Do I have to pay inheritance tax on money I inherit?
Only if the person who died lived in, or owned real estate in, Pennsylvania, New Jersey, Kentucky, Nebraska or Maryland, and you aren’t in an exempt class for that state. There is no federal inheritance tax, and the IRS generally doesn’t treat an inheritance as income. The exception is inherited pre-tax money: withdrawals from an inherited traditional IRA or 401(k) are taxable income to you.
Who pays inheritance tax, the estate or the heir?
Legally it is a tax on each heir’s right to receive property, but in practice the executor usually files the return and pays the tax out of the estate before distributing the rest. New Jersey charges 10% annual interest on tax unpaid after eight months, and Kentucky lets an heir whose tax exceeds $5,000 pay in ten annual installments.
Is life insurance subject to inheritance tax?
Often not when it is paid to a named beneficiary. New Jersey and Maryland exempt those proceeds by law, and Kentucky taxes a policy only when it is payable to the insured or the estate. The federal estate tax works differently: a policy the deceased owned counts in the gross estate even when it pays a named beneficiary.
How much can you inherit without paying taxes?
Federally, any amount. There is no federal inheritance tax, and the federal estate tax is paid by the estate, only on the part above $15,000,000 per person in 2026. State limits depend on the heir. Spouses owe nothing in all five inheritance-tax states, and children owe nothing in New Jersey, Kentucky or Maryland. A Pennsylvania child pays 4.5% from the first dollar, a Nebraska child 1% above $100,000, and a friend of a Kentucky resident pays tax above a $500 exemption.
Do you pay inheritance tax on an inherited house?
Only where one of the five inheritance-tax states has a claim on it. Real estate is taxed by the state where it sits, so a New Jersey house left to a nephew owes New Jersey tax at 15% even if the owner lived in Florida, while a home left to a surviving spouse is exempt in all five states. Income tax is separate: the heir’s basis steps up to the value at death, so a prompt sale usually brings little capital gains tax.