Inheritance Tax:
What Beneficiaries Owe
Five states tax what beneficiaries receive, at rates set by your relationship to the person who died. Spouses pay nothing, children usually pay little or nothing, and nieces, nephews, and friends can pay up to 16%.
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Your relationship sets the rate
Five states charge an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Unlike an estate tax, it is based on what you receive and how you were related to the person who died. Close family pays little or nothing; more distant relatives and friends can pay up to 16%.
What each beneficiary owes, by relationship
| State | Spouse | Children and grandchildren | Siblings | Others |
|---|---|---|---|---|
| Kentucky | Exempt | Exempt | Exempt | 4% to 16% (nieces, nephews, in-laws); 6% to 16% (others) |
| Maryland | Exempt | Exempt | Exempt | 10% |
| Nebraska | Exempt | 1% above $100,000 | 1% above $100,000 | 11% above $40,000 (aunts, uncles, nieces, nephews); 15% above $25,000 (others) |
| New Jersey | Exempt | Exempt | 11% to 16% above $25,000 | 15% to 16% |
| Pennsylvania | 0% | 4.5% | 12% | 15% |
It depends on their state, not yours
What matters is where the person who died lived, and where any real estate they left you is located. If your aunt lived in Pennsylvania, your inheritance can be taxed at 15% even if you live in Florida. If she lived in a state without an inheritance tax, there is generally none, even if you live in one of these five states.
Who pays it
In most cases the executor files the inheritance tax return and pays the tax out of your share before it reaches you. The will can change that, for example by directing the estate to pay all inheritance taxes. If you received something outside the estate, such as a jointly owned account or a payable-on-death account, you may be responsible for the tax on it directly.
Estate taxes work differently
Twelve states and the District of Columbia charge an estate tax instead, on the estate as a whole before it is divided. That tax reduces what all beneficiaries receive rather than being charged to any one of them, and you would not file anything for it. Maryland has both taxes.
Your own tax return
An inheritance is not income on your federal return. Income the inherited property earns after you receive it is, and so are withdrawals from inherited IRAs and other retirement accounts. If you sell inherited property, your basis is generally its value on the date of death.
What we need from you
- The state where the person who died lived, and where any inherited real estate is located
- Your relationship to them
- Any inheritance tax notice or statement from the executor
- Details of anything you received outside the will (joint or payable-on-death accounts)
Frequently Asked Questions
Do I have to pay inheritance tax on what I inherited?
Only if the person who died lived in (or owned real estate in) Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, and only depending on your relationship to them. Spouses are exempt in all five states, and children are exempt everywhere except Pennsylvania (4.5%) and Nebraska (1% above $100,000). Where you live does not matter.
Who actually pays the inheritance tax?
Usually the executor files the inheritance tax return and pays the tax out of your share before you receive it, so you may never write a check yourself. The will can direct otherwise, for example by having the estate pay all inheritance taxes. If you received property directly, such as a jointly owned account, you may need to pay the tax yourself.
Is an inheritance taxable income on my federal return?
No. An inheritance itself is not income on your federal tax return. What can be taxable is income the inherited property earns after you receive it, and withdrawals from inherited retirement accounts like IRAs.
How is an estate tax different?
An estate tax is paid by the estate on its total value before anything is distributed, so it reduces what everyone receives rather than being charged to you. Twelve states and DC have one, with exemptions from $1 million (Oregon) to $15 million (Connecticut).