Inheritance Tax Calculator
Inheritance tax is paid by the person receiving assets, unlike estate tax which is paid by the estate. Only six US states impose inheritance taxes, and rates depend on your relationship to the deceased. Use relationship code 1 for spouse/direct heir (typically exempt), 2 for sibling, 3 for other.
Understanding State Inheritance Taxes
Inheritance tax is distinct from the more commonly discussed federal estate tax in a fundamental way: it is paid by the recipient of inherited assets rather than the estate itself. Only six states currently impose inheritance taxes, making it relevant to a relatively small number of Americans. However, for those affected, the tax can be significant, particularly for beneficiaries who are not close family members. Each state sets its own rates, exemptions, and relationship classifications. Close relatives such as spouses and children typically pay no inheritance tax or very low rates, while siblings, nieces, nephews, and unrelated beneficiaries face progressively higher rates. The tax applies based on the state where the deceased resided, not where the beneficiary lives. This means you could owe inheritance tax to a state you have never lived in if the person who left you assets was a resident there. Understanding which state's laws apply and how they classify your relationship to the deceased is the first step in estimating your potential liability.
Inheritance Tax Rates by State
Each inheritance tax state has its own unique rate structure and exemption system. Pennsylvania has the most straightforward system with flat rates: 0% for surviving spouses, 4.5% for direct descendants, 12% for siblings, and 15% for all others. Kentucky exempts close family members and applies rates from 4% to 16% for others, with exemptions between $500 and $1,000. Nebraska taxes everything beyond the exemption at rates from 1% for close relatives to 18% for remote relatives and non-relatives. New Jersey exempts spouses, domestic partners, parents, grandparents, children, and grandchildren, but taxes siblings and others at rates from 11% to 16% above a $25,000 exemption. Maryland has both estate and inheritance taxes, with the inheritance tax applying at a flat 10% to non-exempt beneficiaries. Iowa has been phasing out its inheritance tax and will fully eliminate it by 2025. These variations make state-specific planning essential for families in affected jurisdictions.
Planning Around Inheritance Taxes
Several strategies can reduce or eliminate inheritance tax exposure for your beneficiaries. Lifetime gifting is one of the most effective approaches because most states with inheritance taxes do not apply them to gifts made during the donor's lifetime. Regular gifts within the federal annual exclusion reduce the estate that will ultimately be subject to inheritance tax. Irrevocable trusts can remove assets from the inheritance tax base, though the specific rules vary by state. Life insurance owned by an irrevocable life insurance trust provides tax-free proceeds to beneficiaries outside the inheritance tax system. For residents of inheritance tax states who are concerned about the impact on distant relatives or friends, designating these beneficiaries through carefully structured trusts rather than outright bequests can provide significant savings. Some individuals consider establishing domicile in a state without inheritance tax, though this requires genuinely relocating, not merely claiming a new address. The interplay between federal estate tax, state estate tax, and state inheritance tax can be complex, making professional guidance worthwhile for estates of any significant size.
Frequently Asked Questions
What is the difference between estate tax and inheritance tax?
Estate tax is paid by the deceased person's estate before distribution to heirs. Inheritance tax is paid by the individual who receives the assets. The federal government only has an estate tax. Six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose inheritance taxes, and Maryland has both.
Are spouses exempt from inheritance tax?
Yes, in all states that impose inheritance taxes, surviving spouses are completely exempt. Children are also exempt or subject to very low rates in most inheritance tax states. The highest rates typically apply to non-related beneficiaries, who may face rates up to 15-18% depending on the state.
Which states have inheritance tax?
As of 2024, six states levy inheritance taxes: Iowa (being phased out by 2025), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates, exemptions, and beneficiary classifications vary significantly between states. Some apply rates as low as 1% for close relatives and up to 15-18% for unrelated heirs.
Is there a federal inheritance tax?
No, the United States does not have a federal inheritance tax. The federal government only imposes an estate tax, paid by the estate itself. However, inherited assets may be subject to federal income tax if they generate income, and inherited retirement accounts have required distribution rules.
Can I avoid inheritance tax?
Strategies include the deceased transferring assets before death through gifting, establishing trusts that remove assets from the taxable inheritance, designating tax-exempt beneficiaries, and purchasing life insurance in an irrevocable trust to provide liquidity. Moving to a state without inheritance tax also eliminates the obligation.