Is Inheritance Taxable?

They say you can’t take it with you. At the same time, you don’t want the wealth you've spent a lifetime building to be diminished by taxes, leaving less for your loved ones. See if your heirs could be exposed to taxes on their inheritance – and what you can do about it today.

Understanding Inheritance Tax

Is Inheritance Taxable in the US?

Let’s start with the good news: there’s no federal inheritance tax in the United States. But five states currently impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Iowa was the most recent state to repeal the tax, eliminating it as of the start of 2025. And with ongoing discussion and legislation, it’s always possible other states could amend or remove their inheritance tax in the future.

How Inheritance Tax Works

If you’re living in one of those five states at the time of your passing, recipients of any money or property from your estate could have to pay an inheritance tax when they take possession of these assets (It doesn’t matter whether the state they live in has the tax). However, the amount they’ll pay varies depending on the state, the value of the assets and their relationship to you – and it could very well be zero. We’ll show you why.

Inheritance Tax Rates and Exemptions

The chart below outlines the differences in exemptions and tax rates among the five states that have an inheritance tax. Exemptions mean that anything up to that threshold – like $25,000 in New Jersey – isn’t subject to tax. The tax is typically applied progressively beyond that amount, up to the state’s limit.

You’ll also see that the tax rates start at zero because many close relatives can avoid inheritance tax altogether. For example, in all of the states that have inheritance taxes, spouses are exempt, with some states fully or partially exempting immediate relatives. Certain relatives, such as siblings, are subject to the tax in some states (for example, New Jersey) but not in others (including Maryland).

Estate and Inheritance Taxes by State (2024)

Source: Tax Foundation: Estate and Inheritance Taxes by State, 2024

Inheritance Tax vs Estate Tax

Key Differences

Inheritance tax and estate tax fall under what’s become popularly known as “death taxes.”  Both can impact the assets you plan to leave behind. But there’s a difference.

Estate tax is imposed upon your estate – the total value of everything you own when you die, including cash, investments, property and other assets. It’s paid directly from your estate before any assets are distributed to your heirs. Inheritance taxes, on the other hand, are paid by your heirs upon receiving assets from your estate. Inheritance tax is based upon the heir's relationship to the decedent.

We already mentioned that there’s no federal inheritance tax, but there is a federal estate tax. It’s generally owed if your taxable estate is valued (by assessing the fair market value of all assets and applying deductions) at more than the filing threshold for the year of death, known as the estate tax exemption. The 2025 federal estate tax exemption is $13.99 million for individuals, so the tax actually applies to a very small percentage of estates.

Are Inherited Assets Subject to Income Tax?

Inheritances are generally not considered income for federal income tax purposes. However, earnings produced from those assets down the road are taxable to the recipient. That can include interest or dividends from cash, and income from the sale of stocks or bonds, real estate or any other property, from an automobile to an art collection.

How to Help Minimize or Avoid Inheritance Tax

If you think any of your heirs may be at risk of incurring inheritance tax, don’t worry. There’s still time to take action. Consider strategies like these:

Gift Giving

You don’t have to wait until you pass away to transfer assets to your loved ones. You can give away a certain amount every year – In 2025, it’s $19,000 per recipient – without triggering gift tax. This strategy also helps reduce your taxable estate, and you get to watch your heirs enjoy their inheritance during your lifetime.

Trusts

An irrevocable trust can remove assets from your taxable estate – and their classification as an inheritance – helping reduce or eliminate your potential tax liability.

Charitable Donations

Assets that you leave to a favorite charity may be excluded from your taxable estate and can also provide additional tax benefits today.

Ready to Act? Essential Takeaways and Steps Forward

With only five states imposing an inheritance tax, plus exemptions within those states, you may not have to worry much – or at all – about inheritance tax impacting your heirs. If you do need to create a plan, make sure you understand how inheritance tax works in your state and talk to a financial advisor who has tax planning experience and can work with your qualified tax and legal professionals. They may also be able to connect you with an attorney in your area for certain estate planning strategies, like creating a trust.