State Inheritance Tax Guide 2026: The 5 States That Tax Inheritances

Inheritance tax is often confused with estate tax, but they work completely differently. Estate tax is paid by the estate before any assets are distributed. Inheritance tax is paid by each individual who receives an inheritance, and crucially, the rate depends on your relationship to the person who died — not just the amount received. Spouses are universally exempt. Children are often taxed at low or zero rates. But distant relatives, friends, and unmarried partners can face rates up to 16% in some states.

Only 5 US states currently impose inheritance tax (Iowa repealed its tax for deaths on or after January 1, 2025). Most Americans live in states with no inheritance tax at all. But if you live in — or receive an inheritance from someone who lived in — Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania, understanding these rules before a family member dies could save thousands of dollars in avoidable tax.

The 5 Inheritance Tax States: Rate Tables and Rules

Each of the 5 inheritance tax states classifies beneficiaries into groups (often called “classes”) and applies different rates based on the relationship to the deceased. Here is a complete breakdown:

Iowa (IA) — Repealed

Iowa repealed its inheritance tax effective January 1, 2025. No Iowa inheritance tax is due on the estate of a decedent who died on or after that date, whatever the beneficiary’s relationship to the decedent.

Kentucky (KY)

Maryland (MD)

Maryland also imposes a state estate tax on estates above $5M — it is the only state with both taxes. In practice, most Maryland family inheritances are exempt from inheritance tax, but non-family beneficiaries (friends, domestic partners, distant relatives) pay 10%.

Nebraska (NE)

Nebraska lowered its Class 2 and Class 3 rates and raised exemption amounts for deaths on or after January 1, 2023. Spouses are exempt.

New Jersey (NJ)

New Jersey abolished its estate tax in January 2018. However, it kept the inheritance tax. A New Jersey resident who leaves assets to a sibling triggers NJ inheritance tax at 11–16%. Leaving the same assets to a child: zero NJ tax.

Pennsylvania (PA)

Pennsylvania inheritance tax applies to most assets of a Pennsylvania-resident decedent, including bank accounts, real estate, retirement accounts (IRAs, 401(k)s), brokerage accounts, and life insurance proceeds (if payable to the estate rather than a named beneficiary). There is no minimum threshold — even small inheritances are technically subject to the tax, though amounts under a few thousand dollars are rarely pursued.

Pennsylvania Inheritance Tax: The Most Common Surprise

Pennsylvania’s inheritance tax is the most frequently misunderstood inheritance tax in the country — and for good reason. Most people assume that inheriting from a parent is tax-free. At the federal level and in 45 states, it is. But in Pennsylvania, a child inheriting from a parent pays 4.5% on the entire inheritance, with very limited exemptions.

Why Pennsylvania Catches Families Off Guard

Consider a typical Pennsylvania scenario: A parent dies with a $400,000 home, $150,000 in a traditional IRA, and $50,000 in a bank account. Their adult child is the sole beneficiary.

The child owes $27,000 in Pennsylvania inheritance tax, payable within 9 months of the parent’s death. Many families are not prepared for this bill, particularly when the primary asset is an illiquid home that must be sold to fund the tax.

Key Pennsylvania Inheritance Tax Rules

• Retirement accounts: Traditional IRAs and 401(k)s inherited by children are subject to PA inheritance tax at 4.5% on the full account value at date of death — separate from and in addition to federal income tax on withdrawals.
• Life insurance: If paid to a named beneficiary (not the estate), life insurance proceeds are generally exempt from PA inheritance tax.
• Joint property: Assets held jointly with right of survivorship (JTWROS) by spouses pass free of inheritance tax. But joint ownership between parent and child is more complex.
• 5% early payment discount: Pennsylvania offers a 5% discount on inheritance tax paid within 3 months of death. If a child owes $27,000, paying within 3 months reduces it to $25,650.
• Small estates: The Register of Wills may have simplified procedures for small estates, but the inheritance tax itself still applies.

Planning Strategies in Pennsylvania

The most effective Pennsylvania inheritance tax planning strategies include: (1) annual gifting during the parent’s lifetime to reduce the taxable estate (gifts made more than one year before death may be partially excluded); (2) beneficiary designations directing retirement accounts to a spouse rather than children, at least as primary beneficiary; (3) Roth IRA conversions during the parent’s lifetime — the Roth account still faces 4.5% PA inheritance tax, but the child avoids federal income tax on withdrawals, which can partially offset the inheritance tax cost.

Estate Tax vs Inheritance Tax: Key Differences

The distinction between estate tax and inheritance tax is fundamental — yet many people (and even some financial articles) conflate the two. Here’s a clear breakdown:

Practical Implication: Who Writes the Check?

With estate tax, the executor pays from estate funds before heirs receive anything. If an Oregon estate owes state estate tax, it comes out of the estate — every beneficiary effectively shares the cost proportionally through reduced distributions.

With inheritance tax, each beneficiary is personally responsible for their own tax bill. In Pennsylvania, a child who inherits a house must pay 4.5% of the home’s value from their own funds (or by selling the asset). Siblings face 12%. The executor is responsible for collecting and remitting the tax, but the economic burden falls on the recipient.

This difference matters for estate planning. Equalizing inheritances among children while accounting for inheritance tax requires careful calculation — a child who inherits a taxable IRA receives less after-tax than a child who inherits a life insurance policy (often exempt), even if the gross amounts are equal.