What Is an Inheritance Tax?

Senior couple talking to a financial advisor about inheritance tax their beneficiaries may have to pay.
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DEFINITION

An inheritance tax is a state tax that heirs and beneficiaries who receive property from a deceased person's estate sometimes have to pay. The tax is typically a percentage of the value of what they receive, based on their degree of kinship to the deceased.

How an Inheritance Tax Works

An inheritance tax is assessed on individual bequests, not an entire estate, by the state in which the decedent lived or where they owned property. Some people make provisions in their estate plans or wills that their estate should pick up the tab on behalf of the beneficiary.

Tax rates are typically graduated, with spouses being exempt and more distant relatives and non-relatives paying the highest percentage. Some states exempt direct descendants as well.

Maryland, New Jersey, Pennsylvania, Kentucky, Iowa, and Nebraska have inheritance taxes as of 2022.

The inheritance tax rate usually graduates, depending upon the degree of kinship between the deceased and their beneficiary. Tax rates in Pennsylvania, for example, are lowest for inheritances passed to a surviving spouse or to a parent from a child that was 21 or younger . Charitable organizations that inherit may be exempt.

Some states, like New Jersey, group beneficiaries into classes that determine the inheritance tax rate they'll have to pay. For example, siblings fall into "Class C" in New Jersey.

Small inheritances can often avoid the tax, because taxation doesn't kick in until the gift's value exceeds a certain exemption threshold. For example, New Jersey's inheritance tax ranges from 0% to 16%, but the 16% rate applies only the amount of bequests valued above $700,000 or more for Class D beneficiaries, and to the dollar amount valued above $1.7 million for Class C beneficiaries.

An Example of Inheritance Taxes

If your father, who lived in New Jersey, left you $25,000, you would not owe tax on the money. If he left you $500,000, the first $25,000 would be tax-free, and you would pay 11% tax on $475,000 of your inheritance. The amount of the inheritance tax you would pay to the state of New Jersey would be $52,250.

Inheritance Tax vs. Estate Tax

Inheritance Tax Estate Tax
Payable by the beneficiary Payable by the estate
Based on the value of a single bequest Based on the value of an entire estate
Rates graduate based on the beneficiary's familial relationship with the deceased A single rate typically applied to the portion of the value of an estate that exceeds an exemption amount

An inheritance tax isn't the same as an estate tax, although both are commonly referred to as "death taxes." An estate tax is imposed on the entire estate and the estate is responsible to pay any required taxes, whereas the beneficiary of an inheritance has to pay an inheritance tax, generally speaking.

Twelve states and the District of Columbia have estate taxes as of 2022. Only Maryland has both an inheritance tax and an estate tax.

Tennessee imposed a state death tax that was based on the overall value of the deceased person's total property, which is technically an estate tax. The state referred to this tax as an inheritance tax in its statutes, and the tax was ultimately eliminated in 2016. 

Do I Need to Pay an Inheritance Tax?

You wouldn't have to pay an inheritance tax even if you live in a state that has one as long as the decedent didn't live and die there as well. However, there's an exception to this rule if you inherit real property that's located in a state with inheritance taxes. The tax is applied by the decedent's state of residence and the property's location. You would not be responsible for inheritance tax unless the person who left you the money lived in one of the six states subject to the tax, and the amount of your inheritance met the threshold for the tax.

For example, you would not have to pay New Jersey inheritance tax if you live there but your brother, who lived in New York, left you $500,000 in his will. Still, your brother's estate could be subject to other state or federal taxes. If the situation were reversed (you lived in New York and your brother lived in New Jersey), the $500,000 he left you would be subject to New Jersey's inheritance tax.

Key Takeaways

  • As of 2022, an inheritance tax is imposed by six states on the value of a single bequest made to a beneficiary.
  • The federal government does not tax inheritances.
  • The beneficiary, not the estate, is responsible for paying the inheritance tax, but some estate plans provide for the estate to pay the tax for it.
  • Speak with a local accountant or estate planning attorney if you think you might be subject to an inheritance tax because the rules can vary somewhat by jurisdiction.

Article Sources

  1. Tax Foundation. "Does Your State Have an Estate or Inheritance Tax?"

  2. Pennsylvania Department of Revenue. "Inheritance Tax."

  3. New Jersey Division of Taxation. "Inheritance Tax Beneficiary Classes."

  4. New Jersey Division of Taxation. "Estate Tax Rates."

  5. Protective Life Corporation. "Inheritance Tax vs. Estate Tax."

  6. American College of Trust and Estate Counsel. "State Death Tax Chart."

  7. Tennessee Department of Revenue. "Inheritance Tax." Accessed Feb. 5, 2022.

  8. New Jersey Division of Taxation. "Inheritance and Estate Tax."