Estate and inheritance taxes might sound similar, but they hit your wallet in very different ways. If you’re planning your legacy or expecting to inherit, knowing the key differences can save you and your loved ones a serious tax headache. Get into these 10 essential distinctions to stay informed and make smarter financial decisions. Let’s break it down.
Who Pays The Tax: Estate Vs. Heirs
According to IRS guidelines, the estate tax is settled by the estate before any distributions are made. In contrast, inheritance tax is charged in just six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, and is paid by individual heirs. A NerdWallet report confirms that exemptions vary widely depending on relationships and local laws.
Federal Vs. State Application
The 2024 Tax Foundation report shows the federal government only imposes the estate tax. Inheritance taxes? That’s up to the states. Even if your estate dodges federal taxes, your state might not be so forgiving. For example, the report shows that New Jersey dropped its estate tax but kept the inheritance tax.
Exemption Thresholds Differ Greatly
A 2025 report from the Urban-Bookings Tax Policy Center highlights that the federal estate tax exemption exceeds $13 million. Some state inheritance tax exemptions, however, sit at $500. Surprisingly, these thresholds fluctuate annually and could drop significantly in 2026 due to sunset provisions in current tax law.
Relationship To The Deceased Matters
As per findings from a 2023 Kiplinger breakdown, inheritance tax rates hinge heavily on family ties. While spouses and children often pay nothing, distant relatives or friends may face significant tax burdens. In Nebraska, for instance, siblings pay, but spouses don’t. Connection counts more than you’d expect.
Pre-Death Vs. Post-Death Calculation
Timing changes everything. Data from SmartAsset suggests the estate tax is calculated before assets are distributed, based on the total value at death. Inheritance tax, though, comes after and applies to each heir separately. Multiple heirs can mean multiple filings and tax scenarios. It’s not one-size-fits-all.
Double Taxation Risk Exists
Yes, you can get taxed twice. Researchers at the Center on Budget and Policy Priorities found that Maryland is the only state with both estate and inheritance taxes. This overlap can take a real bite out of what heirs receive. Careful estate planning is the best way to dodge the squeeze.
Charitable Donations Are Treated Differently
In one of the most comprehensive studies by Planned Giving Today, charitable donations reduce estate tax liability but may not protect heirs from inheritance tax. Some states still tax beneficiaries, even if the estate supported nonprofits. Donation benefits vary and may not extend beyond the grave.
Portability Options Only Apply To Estate Tax
A report from the U.S. Department of the Treasury indicates that the federal estate tax allows spousal exemption transfers, called portability. No similar feature exists for inheritance tax. Married couples can plan to shield assets federally, but each heir still faces state inheritance tax on their own.
Tax Rates Vary Widely By Type
Research published by Forbes shows federal estate tax rates climb from 18% to 40%, depending on the estate’s value. Inheritance tax rates? Entirely state-dependent. In Pennsylvania, children pay 4.5%, while unrelated heirs pay 15%. Geography and family status can significantly alter what is owed.
Tax Planning Tools Target One Or The Other
A Fidelity analysis reveals that trusts and lifetime gifts help reduce estate taxes. Inheritance taxes require different planning strategies, such as staggered transfers or life insurance. Some strategies, like irrevocable trusts, can limit both burdens. However, most tools are tax-specific, making customized planning vital for long-term wealth transfer.
