Inheriting money or assets can be complicated by taxes — but most people don’t owe as much as they fear. This guide explains federal estate tax, state inheritance taxes, and how to calculate your potential liability.
Estate Tax vs. Inheritance Tax
| Type | Who Pays | What’s Taxed | Where Applied |
|---|---|---|---|
| Estate Tax | The estate (before distribution) | Total estate value | Federal + 12 states + DC |
| Inheritance Tax | Beneficiaries (after receiving) | Each beneficiary’s share | 6 states |
| Income Tax | Beneficiary | IRA/401(k) distributions | All states with income tax |
Federal Estate Tax (2026)
| Item | 2026 Value |
|---|---|
| Exemption (individual) | $13.99 million |
| Exemption (married, with portability) | $27.98 million |
| Maximum tax rate | 40% |
| Estates owing federal tax | <0.2% (about 4,000/year) |
Federal Estate Tax Brackets
| Taxable Estate (Above Exemption) | Tax Rate |
|---|---|
| $0 - $10,000 | 18% |
| $10,001 - $20,000 | 20% |
| $20,001 - $40,000 | 22% |
| $40,001 - $60,000 | 24% |
| $60,001 - $80,000 | 26% |
| $80,001 - $100,000 | 28% |
| $100,001 - $150,000 | 30% |
| $150,001 - $250,000 | 32% |
| $250,001 - $500,000 | 34% |
| $500,001 - $750,000 | 37% |
| $750,001 - $1,000,000 | 39% |
| Over $1,000,000 | 40% |
Federal Estate Tax Calculation Example
| Item | Amount |
|---|---|
| Gross estate | $16,000,000 |
| Debts and expenses | ($500,000) |
| Taxable estate | $15,500,000 |
| Less exemption | ($13,990,000) |
| Amount subject to tax | $1,510,000 |
| Estate tax owed | ~$600,000 |
States With Inheritance Tax (2026)
Only 6 states have inheritance tax:
| State | Exemptions | Rates |
|---|---|---|
| Iowa | Spouses, lineal descendants exempt | 2-6% (others) |
| Kentucky | Spouses, children, parents exempt | 4-16% |
| Maryland | Spouses, children, parents exempt | 10% |
| Nebraska | Spouses exempt | 1-18% |
| New Jersey | Spouses, children, parents exempt | 11-16% |
| Pennsylvania | Spouses exempt | 0-15% |
Inheritance Tax by Relationship
| State | Spouse | Children | Siblings | Others |
|---|---|---|---|---|
| Iowa | 0% | 0% | 2-6% | 2-6% |
| Kentucky | 0% | 0% | 4-16% | 6-16% |
| Maryland | 0% | 0% | 10% | 10% |
| Nebraska | 0% | 1% | 13% | 18% |
| New Jersey | 0% | 0% | 11-16% | 15-16% |
| Pennsylvania | 0% | 4.5% | 12% | 15% |
States With Estate Tax (2026)
12 states + DC have state-level estate tax:
| State | Exemption | Top Rate |
|---|---|---|
| Connecticut | $13.99M (matches federal) | 12% |
| District of Columbia | $4.71M | 16% |
| Hawaii | $5.49M | 20% |
| Illinois | $4.0M | 16% |
| Maine | $6.8M | 12% |
| Maryland | $5.0M | 16% |
| Massachusetts | $2.0M | 16% |
| Minnesota | $3.0M | 16% |
| New York | $7.16M | 16% |
| Oregon | $1.0M | 16% |
| Rhode Island | $1.77M | 16% |
| Vermont | $5.0M | 16% |
| Washington | $2.193M | 20% |
Note: Maryland has BOTH estate tax AND inheritance tax.
State Estate Tax Calculation Example (Massachusetts)
| Item | Amount |
|---|---|
| Estate value | $3,500,000 |
| State exemption | $2,000,000 |
| Taxable amount | $1,500,000 |
| State estate tax | ~$147,000 |
Inheritance Tax Calculation Examples
Example 1: Pennsylvania (Child Inheriting $500,000)
| Item | Amount |
|---|---|
| Inheritance | $500,000 |
| Pennsylvania rate (children) | 4.5% |
| Tax owed | $22,500 |
Example 2: New Jersey (Sibling Inheriting $500,000)
| Item | Amount |
|---|---|
| Inheritance | $500,000 |
| New Jersey exemption (siblings) | $25,000 |
| Taxable amount | $475,000 |
| Tax rate | 11-16% (graduated) |
| Approximate tax | $60,000-70,000 |
Example 3: Nebraska (Niece Inheriting $200,000)
| Item | Amount |
|---|---|
| Inheritance | $200,000 |
| Nebraska exemption (remote relatives) | $25,000 |
| Taxable amount | $175,000 |
| Rate (remote relatives) | 18% |
| Tax owed | $31,500 |
Inheriting Retirement Accounts
| Account Type | Tax Treatment |
|---|---|
| Traditional IRA/401(k) | Withdrawals taxed as income |
| Roth IRA/401(k) | Withdrawals tax-free (if qualified) |
| Non-spouse beneficiary | Must empty within 10 years |
| Spouse beneficiary | Can roll to own IRA |
Inherited IRA Distribution Requirements
| Beneficiary Type | Required Distribution |
|---|---|
| Spouse | Can treat as own; no RMDs until 73 |
| Non-spouse (younger) | 10-year rule; annual RMDs may apply |
| Non-spouse (older/disabled) | Life expectancy method |
| Non-designated (estate) | 5-year rule or life expectancy |
Tax Planning for Inherited IRAs
| Strategy | Benefit |
|---|---|
| Spread distributions over 10 years | Avoid jumping tax brackets |
| Take more in low-income years | Lower marginal rate |
| Coordinate with other income | Roth conversions, capital gains |
| Consider state taxes | Some states don’t tax retirement income |
Stepped-Up Basis for Inherited Assets
When you inherit non-retirement assets, you get a stepped-up basis:
| Scenario | Original Cost | Value at Death | Your New Basis | Gain if Sold at $600k |
|---|---|---|---|---|
| Without step-up | $100,000 | $500,000 | $100,000 | $500,000 taxable |
| With step-up | $100,000 | $500,000 | $500,000 | $100,000 taxable |
This eliminates capital gains on appreciation during the decedent’s lifetime.
Assets That Receive Step-Up
| Gets Step-Up | No Step-Up |
|---|---|
| Stocks | Traditional IRA |
| Real estate | 401(k) |
| Mutual funds | Annuities |
| Business interests | Savings bonds (depends) |
| Collectibles | Income in respect of decedent |
Strategies to Minimize Estate/Inheritance Tax
Lifetime Giving
| Strategy | How It Works |
|---|---|
| Annual gift exclusion | $19,000/person/year (2026) tax-free |
| Lifetime gift exemption | $13.99M (same as estate exemption) |
| 529 plan superfunding | 5 years of gifts at once |
| Direct tuition/medical payments | Unlimited if paid directly |
Trusts
| Trust Type | Purpose |
|---|---|
| Irrevocable Life Insurance Trust (ILIT) | Remove life insurance from estate |
| Charitable Remainder Trust | Income + charity + estate reduction |
| Grantor Retained Annuity Trust (GRAT) | Transfer appreciation tax-free |
| Qualified Personal Residence Trust (QPRT) | Transfer home at reduced value |
Other Strategies
| Strategy | Benefit |
|---|---|
| Spousal transfers | Unlimited marital deduction |
| Charitable donations | Reduce taxable estate |
| Family Limited Partnership | Discount asset values |
| Portability election | Use deceased spouse’s exemption |
What to Do When You Receive an Inheritance
| Step | Action |
|---|---|
| 1 | Don’t make major decisions for 6-12 months |
| 2 | Understand what you’re inheriting (assets, debts) |
| 3 | Determine tax implications |
| 4 | Update beneficiaries on your own accounts |
| 5 | Consider working with a financial advisor |
| 6 | Create a plan for the assets |
Estate Tax Sunset Warning (2026)
Important: The current $13.99M exemption is scheduled to decrease to approximately $7 million (inflation-adjusted 2017 level) after December 31, 2025 unless Congress acts.
| Period | Exemption |
|---|---|
| 2024-2025 | $13.61M - $13.99M |
| 2026+ (if sunset) | ~$7M (estimated) |
This could dramatically increase the number of estates subject to federal estate tax.
State-by-State Quick Reference
No Estate or Inheritance Tax
| State | Status |
|---|---|
| Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, Wyoming | No state estate or inheritance tax |
Planning for Each Scenario
| Your Situation | Key Considerations |
|---|---|
| Estate under $5M | Likely no federal or state estate tax |
| Estate $5M-$14M | May have state estate tax; check your state |
| Estate over $14M | Federal estate tax likely applies |
| Inheriting in 6-state zone | Check inheritance tax based on relationship |
| Inheriting retirement accounts | Plan distributions to minimize income tax |