Differences Between the Estate Tax and an Inheritance Tax

Not all "death taxes" are the same

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The most significant difference between an estate tax and an inheritance tax is who is responsible for paying it. The terms are often used interchangeably when someone dies, but they're two different types of death taxes.

An estate tax is calculated based on the net value of all the property owned by a decedent as of the date of death. The estate's liabilities are subtracted from the overall value of the deceased's property to arrive at the net taxable estate. Any resulting tax bill is paid by the estate.

An inheritance tax is calculated based on the value of individual bequests received from a deceased person's estate. The beneficiaries are liable for paying this tax, though a will sometimes provides that the estate should pick up this tab as well.

How an Estate Tax Works

At one point, all states had an estate tax. The federal estate tax return offered a credit toward state-level estate taxes and states based their own tax rates on this federal credit. But that changed in 2001 when federal tax law amendments eliminated the credit. Many states repealed their estate taxes as a result.

Twelve states and the District of Columbia collect an estate tax at the state level as of 2022. Indiana, Ohio, and North Carolina had estate taxes, but they were repealed in 2013. Tennessee followed suit in 2016, and New Jersey and Delaware eliminated their estate taxes as of 2018. Oklahoma and Kansas have also repealed their estate taxes.

All states that collect an estate tax offer exemptions and the value of these exemptions can vary. Only the net value of an estate that exceeds the exemption amount is taxed, and the tax comes off the top of the estate before bequests can be made to beneficiaries from anything that remains.

As for the federal estate tax, very few estates find themselves liable for it, because the exemption at that level is $12.06 million as of 2022. Only estates valued at more than this are subject to the tax.

How an Inheritance Tax Works

The federal government doesn't have an inheritance tax, and only six states collect one. Maryland has the dubious distinction of being the only state to collect both an estate and an inheritance tax as of 2022.

The other five states with an inheritance tax are Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania. Indiana had one, but it's been repealed.

Transfers to surviving spouses are completely exempt from the inheritance tax in all six states that collect it. Four states—Iowa, Kentucky, Maryland, and New Jersey—also exempt transfers to surviving children and grandchildren, but property passing to children and grandchildren is subject to the state inheritance tax in Nebraska and Pennsylvania.

More distant heirs, such as siblings, nieces, nephews, and friends, must typically pay this tax, and the tax rate tends to escalate as the degree of kinship decreases.

Note

Most states offer exemptions for inheritance taxes as well. Only gifts above a certain value are taxed.

Example of a Taxable Estate

John Doe died owning assets valued at $5 million. His liabilities, including any mortgages he held and other debts, totaled $2 million at the time of his death. His net estate is, therefore, $3 million for estate tax purposes—the value of his assets less his liabilities.

John's estate would not be liable for the federal estate tax at $3 million, because this valuation is well below the $12.06 million federal exemption threshold. However, his state's exemption is only $1 million. The balance over this amount—$2 million—would thus be subject to a state-level estate tax.

Assuming that his state's tax rate is 15%, John's estate would owe $300,000 before any bequests could be made: 15% of $2 million. The remaining $1.7 million balance would pass to his beneficiaries or heirs.

Example of a Taxable Bequest

John left his best friend a home valued at $500,000, and John's state also collects an inheritance tax of 15% from nonrelatives. His friend, who isn't related to him, is liable for the inheritance tax on this amount. She would owe the state $75,000 for her receipt of the house, assuming that John's will didn't indicate that his estate would pay the tax.

Note

The house was part of John's $3 million estate, so it's effectively taxed twice.

The Bottom Line

You might want to choose your beneficiaries carefully so as to avoid having them incur a state inheritance tax. That might mean excluding brothers, sisters, nieces, nephews, and friends, however. You can also provide that your estate will pay the inheritance tax, but that would leave less for your beneficiaries overall.

This option isn't available in a state that collects an estate tax.

Note

Consider consulting with a local estate planning attorney about the best way to protect your assets under your state's tax laws.

Frequently Asked Questions (FAQs)

Does each spouse get their own estate tax exemption?

Each spouse is entitled to their own federal estate tax exemption, although the rules for state-level estate taxes can vary. Surviving spouses can additionally claim any unused portion of their deceased spouse's exemption. For example, Spouse B could claim the unused $4 million if Spouse A's estate used only $8.06 million of their exemption in 2022. That would allow Spouse B to exempt $16.06 million in property. This is referred to as the "portability election," and the rule has been in place since January 2011.

Is it true that the federal estate tax exemption is going to drop by half in 2026?

The Tax Cuts and Jobs Act (TCJA) effectively doubled the federal estate tax exemption when the law went into effect in 2018, increasing it from $5.45 million to $11.4 million. But the TCJA will expire in 2026, so it's possible that the exemption will plummet back to its 2017 level at that time if Congress doesn't take steps to renew the law or at least this provision of it.

The IRS stated in 2019 that the value of gifts given from 2018 through 2025 won't be affected if the exemption drops again at that time. The estate tax exemption covers the value of lifetime gifts as well.

What states have the highest inheritance and estate tax rates?

Hawaii and Washington had the highest estate tax rates as of March 2022 at 20% for estates valued at $5.5 million and $2.2 million respectively. Nebraska had the highest inheritance tax at 18% for distant relations and non-related heirs, but at least it doesn't impose an estate tax.

Note

State laws change frequently, and the preceding information may not reflect recent changes. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Estate Tax."

  2. IRS. "Estate Tax."

  3. Northeastern University D'Amore-McKim School of Business. "What Estate Tax Changes Happened Under the TCJA?"

  4. IRS. "Estate and Gift Tax FAQs."

  5. AARP. "17 States With Estate or Inheritance Taxes."

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