Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
What is an inheritance tax?
An inheritance tax is a state tax that is occasionally levied on assets inherited from someone who died. The person who inherits the assets pays the inheritance tax, and rates can vary based on the size of the inheritance as well as the inheritor's relationship to the deceased.
Is an inheritance taxable?
Inheritances can be taxable, particularly if they're passed down to you from someone who is not an immediate family member. However, it's important to note that inheritance taxes are often avoided for several reasons:
Only six states actually impose this tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. In 2021, Iowa passed a bill to begin phasing out its state inheritance tax, eliminating it completely for deaths occurring after January 1, 2025.
The deceased’s spouse is typically exempt, meaning money and items that go to them aren't subject to inheritance tax. Children of the deceased are also sometimes exempt.
However, it's worth noting that these taxes are set by the state, so where you live, the specifics of your inheritance and your tax situation can dramatically change your tax bill.
» Inherited an IRA? Learn the rules
Inheritance taxes vs. estate taxes
Inheritance tax and estate tax are two different things. Inheritance tax is what the beneficiary — the person who inherited the wealth — must pay when they receive it. Estate tax is the amount that’s taken out of someone’s estate upon their death. One, both or neither could be a factor when someone dies.
There is no federal inheritance tax, but there is a federal estate tax. In 2021, federal estate tax generally applies to assets over $11.7 million, and the estate tax rate ranges from 18% to 40%. In 2022, the federal estate tax generally applies to assets over $12.06 million. Some states also have estate taxes (see the list of states here) and they might have much lower exemption thresholds than the IRS. Assets that spouses inherit generally aren't subject to estate tax.
Because the estate tax and inheritance tax are different, some people can occasionally get hit with a double whammy. Maryland, for example, has an estate tax and an inheritance tax, which means an estate might have to pay the IRS and the state, and then the beneficiaries might have to pay the state again out of what’s left. However, this isn't the norm across the country.
» Planning your estate? Know the difference between wills and trusts
States that have estate taxes, inheritance taxes or both:
» Dive deeper: Establishing state residency to ease your tax burden
Promotion: NerdWallet users get 25% off federal and state filing costs.
Promotion: NerdWallet users can save up to $15 on TurboTax.
How to avoid inheritance tax
There are a few ways to minimize the tax bite on handed-down assets. Getting help from a qualified tax expert can be key, but one common element of estate planning is to give assets away before dying. Many states don’t tax gifts. (Learn how the gift tax works.) Keep in mind that gifts don’t have to be cash — stocks, bonds, cars or other assets count, too.
Beneficiaries can only do so much to avoid inheritance taxes once they’ve inherited an estate. However, those leaving the estate can take steps ahead of time to ensure beneficiaries are in the best situation possible. These estate-planning vehicles include living trusts, irrevocable trusts and grantor retained annuity trusts.
Watch out for capital gains taxes
If assets appreciate after you inherit them, you might need to pay capital gains tax if you sell the assets.
The capital gains tax rate is based on, among other things, the profit you make. For example, if your father leaves you a stock portfolio worth $200,000 on the day he died, and you sell it all for $350,000 two years later, you might owe capital gains tax on the $150,000 gain.
Certain types of inheritances might also create taxable income. For example, if you inherit an IRA or 401(k), the distributions you take might be taxable.
States might have their own capital gains tax rules, so it's a good idea to seek qualified advice.
There are strategies to reduce capital gains taxes that could be a consideration.
Some helpful links from the IRS:
With $0 minimum balance
With $1 minimum balance
With $0 minimum balance