Inheritance Tax by State 2026: The 5 States That Still Tax Heirs

Inheritance Tax by State 2026: Who Pays, What Rates Apply, and Who Is Exempt

Inheritance tax is one of the most misunderstood taxes in America — and it is frequently confused with estate tax. The distinction matters: estate tax is paid by the deceased person's estate before assets are distributed, while inheritance tax is paid by the individual who receives the inheritance, after the fact. A beneficiary in Nebraska or Kentucky may receive money and then owe the state a percentage of what they inherited.

As of 2026, only five states impose an inheritance tax: Kentucky, Nebraska, New Jersey, Pennsylvania, and Maryland (Iowa fully repealed its inheritance tax effective January 1, 2025). This is in sharp contrast to estate tax, which applies in 12 states plus DC. Understanding which tax applies — and whether you or your heirs might owe it — is essential for both estate planning and inheritance planning.

The good news: most states that have inheritance tax exempt direct family members. Spouses are always exempt. Children and grandchildren are exempt in most states. The tax primarily falls on more distant relatives — cousins, friends, non-married partners, and others with no close blood or legal relationship to the deceased.

The 5 States With Inheritance Tax: Rates, Exemptions, and Who Pays

The table below summarizes the inheritance tax rules for the five states that currently impose this tax, plus Iowa for reference. Note that Iowa's inheritance tax was fully repealed effective January 1, 2025 — no Iowa inheritance tax applies to deaths occurring in 2025 or later.

Key Distinction: Inheritance Tax vs Estate Tax

These two taxes are often confused but work very differently:

• Estate tax: Paid by the deceased person's estate before assets are distributed. The executor pays it. Currently levied by 12 states + DC and the federal government.
• Inheritance tax: Paid by each individual beneficiary after they receive their inheritance. The recipient owes the tax. Only 5 states (KY, NE, NJ, PA, MD) levy this; Iowa has repealed its tax.

Maryland is the only state that imposes both estate tax and inheritance tax. An estate in Maryland can be taxed twice: once at the estate level and again by beneficiaries who are not exempt from inheritance tax.

Worked Example: $200,000 Inheritance in Each State

Scenario: You Inherit $200,000 From Your Uncle (Non-Exempt Relative)

This example illustrates the inheritance tax owed by a niece or nephew (not exempt in most states) receiving $200,000 from an uncle's estate.

Scenario: You Inherit $200,000 as a Child (Lineal Descendant)

Pennsylvania is notable for taxing lineal heirs (children and grandchildren) at 4.5% — unlike most inheritance tax states that fully exempt direct descendants. Pennsylvania has no minimum exemption for children, so even small inheritances owe tax.

Planning Strategies to Reduce Inheritance Tax

Gifting during lifetime: Assets transferred as gifts during the decedent's lifetime are generally not subject to inheritance tax. Pennsylvania has a “transfer within one year of death” rule that can claw back some gifts. Annual gifting programs can reduce the estate size and thus inheritance tax exposure.

Life insurance: Life insurance proceeds paid to a named beneficiary are generally not subject to inheritance tax in most states (they pass outside of probate). Pennsylvania does subject life insurance to inheritance tax in some circumstances, but this varies.

Beneficiary designations: IRAs, 401(k)s, and other accounts with named beneficiaries pass outside of probate and may have different inheritance tax treatment. Always review beneficiary designations in light of state inheritance tax rules.