Is Your Inheritance Taxable?

Whether an inheritance is taxable depends on where you live, your relationship to the deceased and the value of the property you inherit. The federal government does not levy an inheritance tax, but a few states do. Beneficiaries typically don’t owe income tax on cash or property they receive, though some inherited assets like traditional IRAs or 401(k)s can generate income taxes when withdrawn. Estate taxes, on the other hand, are paid by the deceased’s estate before any assets are distributed to heirs.

A financial advisor can also help you create an estate plan for you and your family. Speak with an advisor today.

Is Your Inheritance Taxable?

An inheritance may be taxable depending on a few factors. Your inheritance can actually be taxed in two ways: inheritance taxes and estate taxes. However, you’re only potentially responsible for paying inheritance tax. Estate tax comes directly out of an estate before it’s divided and distributed.

Whether you’ll actually have to pay an inheritance tax depends on which state the deceased lived in, as there is no federal inheritance tax. Only five states impose an inheritance tax in 2025 and beyond: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Iowa previously levied an inheritance tax but gradually phased it out over several years, before fully repealing it Jan. 1, 2025.

Even if you live in one of these states but the deceased did not, you won’t have to pay inheritance tax. State laws are subject to change though, so always double-check with your state tax agency.

A third way you end up paying for your inheritance is through state and federal income taxes. Inheritance isn’t typically considered income, but certain types of assets you inherit may have tax implications. You may have to pay taxes when you take the distributions from an inherited retirement account or when you sell inherited real estate or stocks.

Inheritance Tax vs. Estate Tax

You may hear the terms used interchangeably, but inheritance tax and estate tax are two distinct taxes. The most obvious difference between the two is who pays the tax. Estate tax is taken out of the deceased’s assets before they’re doled out to beneficiaries. With inheritance tax, the tax is levied after the inheritance is distributed to beneficiaries.

While inheritance tax is only levied by certain states, both the federal government and individual states may collect an estate tax. However, the federal estate tax in 2025 only applies to estates that are worth more than $13.99 million or $27.98 million for married couples. Those limits will rise to $15 million and $30 million, respectively, in 2026 under the One Big Beautiful Bill Act. Twelve states, plus the District of Columbia, levy their own estate taxes. Of them, Washington state and Hawaii have the highest estate tax rates in the nation, ranging from 10% to 20%.

Notably, Maryland is only state that currently collects both estate and inheritance taxes. In Maryland, assets can be taxed both before and after distribution. In other states, assets will only be taxed before or after distribution, or at either time.

How Does Inheritance Tax Work?

SmartAsset: Is Your Inheritance Taxable?

Inheritance tax only applies if the deceased lived in one of the five states that levy inheritance tax as of Jan. 1, 2025 (remember, Iowa had an inheritance tax before this date). Even if you live in an inheritance tax state you won’t pay any tax if the deceased lived in a state that did not have one.

You won’t have to pay inheritance tax until after the decedent’s estate goes to the correct beneficiaries. Unlike estate tax, which is collected from the deceased’s assets before they’re distributed to beneficiaries, inheritance tax is levied after distribution. The beneficiaries are responsible for paying inheritance tax.

Each beneficiary may owe a different amount. The amount that a beneficiary owes depends on how much he or she has received, what his or her relationship to the deceased is and in which state the deceased lived.

Inheritance Tax Exemptions

State inheritance tax rates are dependent on the beneficiary’s relationship to the deceased. In all five states, a surviving spouse is exempt from paying inheritance tax. New Jersey is the only state that has a complete exemption for domestic partners. Kids and grandkids are exempt from inheritance tax in each of the states except for Pennsylvania and Nebraska.

Exemption rates vary state by state for siblings, nieces and nephews, aunts and uncles and son- and daughter-in-law. Generally, beneficiaries who don’t have a familial relation to the deceased will pay higher inheritance tax rates.

There are also monetary exemptions. For instance, Kentucky does not levy an inheritance tax on surviving spouses, children, parents and other closely-related kin. While extended family members like aunts, uncles, nieces and nephews are subject to the state’s inheritance tax, the first $1,000 that they receive is exempt.

How Much Is the Inheritance Tax?

Inheritance tax rates vary widely. As previously mentioned, the amount you owe depends on your relationship with the deceased. Inheritance tax rates range from 0% up to 18% of the value of the inheritance.

For 2025, here are the ranges for each of the five states that collect inheritance tax:

Kentucky: 4% – 16%
Maryland: 10%
Nebraska: 1% – 15%
New Jersey: 11% – 16%
Pennsylvania: 4.5% – 15%

How Can I Protect My Inheritance From Taxes?

The most obvious, and perhaps the most logistically difficult, is to try to get your benefactor to move to a state that doesn’t have an inheritance tax. Moving aside, benefactors have the option of putting the assets into a trust. Instead of waiting until after they’ve died to dole out your inheritance, they could consider gifting a portion of the assets each year.

Setting up a trust protects your inheritance from taxation. There are also other tax management strategies you can use when managing your estate or inheritance, working with an account or financial advisor could be helpful.

Bottom Line

Keep in mind that estate tax and inheritance tax are not the same. A beneficiary pays inheritance tax after receiving his or her portion of the assets. In 2025, only five states (Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) have an inheritance tax. Only Maryland levies both estate and inheritance tax. Inheritance tax rates vary depending on your relationship with the deceased. As with anything involving taxes, always be sure to double-check state tax laws before doing anything, as these laws are subject to change.

Tips for Managing an Inheritance

A financial advisor could help you create an estate plan for your family. Finding a financial advisor doesn’t need to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Assess your current situation before making any moves. Look for the area where you need the most help. Owe a lot of debt? Consider using your inheritance to pay that off. Behind on retirement savings? Think about adding the funds to your retirement savings account.