A Clear Guide to State Inheritance Tax Limits and Exemptions

If you are expecting to receive property or assets from a loved one’s estate, you may be wondering about inheritance tax. Understanding the rules, and especially the financial limits, is key to managing your expectations. This guide provides a clear overview of inheritance tax, which states levy it, and the exemption limits you need to know.

What Exactly Is an Inheritance Tax?

An inheritance tax is a state-level tax that a person, known as the beneficiary, may have to pay on money or property they receive from the estate of someone who has passed away. The key thing to remember is that the responsibility for paying this tax falls on the person who inherits the assets, not on the estate of the deceased.

It is important not to confuse inheritance tax with estate tax. They are two different things.

  • Inheritance Tax: Paid by the beneficiary who receives the assets. It is only imposed by a handful of states. There is no federal inheritance tax.
  • Estate Tax: Paid by the deceased person’s estate before any assets are distributed to the heirs. The federal government has an estate tax for very large estates, and some states also have their own estate tax.

The amount of inheritance tax you might owe depends on several factors, including the value of the inheritance, your relationship to the person who passed away, and the specific laws of the state where the deceased lived or owned property.

Which States Have an Inheritance Tax?

As of 2024, only a small number of states impose an inheritance tax. If you are inheriting assets from someone who lived in a state not on this list, you will not have to pay a state inheritance tax.

The states with an inheritance tax are:

  • Iowa
  • Kentucky
  • Maryland
  • Nebraska
  • New Jersey
  • Pennsylvania

It is worth noting that Iowa is in the process of phasing out its inheritance tax, which is set to be fully repealed in 2025. Maryland is unique because it is the only state that has both an inheritance tax and a state estate tax.

Understanding Inheritance Tax Limits and Exemptions

The core of understanding inheritance tax lies in its limits, which are also called exemptions or thresholds. These rules determine how much you can inherit before the tax applies. Unlike a simple flat tax, inheritance tax rates and exemptions almost always depend on your relationship to the deceased.

States typically group beneficiaries into classes. The closer the family relationship, the lower the tax rate and the higher the exemption amount.

Exemptions for Spouses and Close Relatives

In every state that has an inheritance tax, certain beneficiaries are completely exempt.

  • Surviving Spouses: A surviving spouse is universally exempt from paying inheritance tax on any assets they receive from their deceased partner.
  • Children and Grandchildren: In most cases, direct descendants like children and grandchildren also face very low tax rates or are completely exempt. For example, in New Jersey and Pennsylvania, assets passed to children are taxed, but at a lower rate than assets passed to a niece or friend. In Kentucky, children are considered “Class A” beneficiaries and are fully exempt.

State-Specific Tax Rates and Thresholds

Let’s look at some specific examples to see how these limits work in practice. The rules can be complex, and it is always best to consult with a tax professional for advice on your specific situation.

Pennsylvania

Pennsylvania has no exemption amount, meaning the tax applies from the first dollar. However, the rate depends entirely on your relationship to the deceased.

  • 0% Tax Rate: For transfers to a surviving spouse or to a parent from a child aged 21 or younger.
  • 4.5% Tax Rate: For transfers to direct descendants (children, grandchildren) and other lineal heirs.
  • 12% Tax Rate: For transfers to siblings.
  • 15% Tax Rate: For transfers to all other heirs (nieces, nephews, friends, etc.).

Nebraska

Nebraska’s system is a great example of how relationship status creates different tax limits.

  • Immediate Relatives: This includes spouses, parents, grandparents, children, and siblings. They receive a $100,000 exemption. Any amount inherited above this is taxed at 1%.
  • Remote Relatives: This includes nieces, nephews, aunts, and uncles. They receive a $40,000 exemption. Amounts above this are taxed at 13%.
  • All Other Beneficiaries: Anyone not in the first two classes receives a $25,000 exemption. Amounts inherited above this threshold are taxed at a higher rate of 15%.

Kentucky

Kentucky classifies heirs into three groups, with different exemptions and tax rates.

  • Class A: Includes surviving spouses, parents, children, grandchildren, and siblings. These beneficiaries are completely exempt from inheritance tax.
  • Class B: Includes nieces, nephews, daughters-in-law, sons-in-law, aunts, and uncles. They have a $1,000 exemption, and inheritances are taxed at rates from 4% to 16%.
  • Class C: Includes all other relatives and non-relatives. They have a $500 exemption, and inheritances are taxed at rates from 6% to 16%.

New Jersey

New Jersey also uses a class system for beneficiaries.

  • Class A: Spouses, parents, grandparents, and children are fully exempt.
  • Class C: Siblings and the spouse or surviving spouse of a child of the deceased have a $25,000 exemption. Amounts above that are taxed at rates from 11% to 16%.
  • Class D: All other beneficiaries (nieces, friends, etc.) have no exemption on the first $700,000. They are taxed at 15% on this amount and 16% on anything above it.
  • Class E: Charities and government entities are fully exempt.

Frequently Asked Questions

Is there a federal inheritance tax? No. The United States federal government does not have an inheritance tax. The federal government does have an estate tax, but it only applies to estates valued at over $13.61 million per individual for 2024, so it affects a very small percentage of the population.

Who is responsible for filing and paying the inheritance tax? The beneficiary who receives the assets is responsible for filing the appropriate state tax return and paying any inheritance tax owed. The executor of the estate may withhold the tax amount from the distribution to ensure it gets paid.

Do I have to pay taxes on a gift I received before someone passed away? Generally, no. Gifts made during a person’s lifetime are typically not considered part of the inheritance. However, some states have “look-back” periods for very large gifts made shortly before death to prevent people from avoiding estate or inheritance taxes. These rules are complex and vary by state.