
When it comes to passing down assets, inheritance tax plays a significant role in wealth transfer. Understanding how it works—what is taxed, who is exempt, and what steps to take—can help you manage the process smoothly. Here are 10 things you should know about inheritance tax and its impact.
Inheritance Tax Exists Only At The State Level

Many assume inheritance tax applies everywhere, but it is strictly a state-imposed levy. The federal government does not collect it, meaning most U.S. heirs escape this burden. Whether you owe depends entirely on where the individual lived or owned property. Knowing your state’s laws eliminates confusion.
Only Five States Still Impose This Tax

Not every state taxes inherited wealth. Currently, just Maryland, Nebraska, Kentucky, Pennsylvania, and New Jersey levy inheritance taxes. Rates and exemptions vary significantly, so an inheritance in one state may be tax-free, while another could impose a substantial charge.
Beneficiaries Shoulder The Tax Burden, Not The Estate

Receiving an inheritance doesn’t always mean a financial gain. Inheritance taxes are distinct from estate taxes, which are paid directly from the assets left behind. Instead, heirs are responsible for covering the tax, often based on their relationship to the original asset holder.
Close Relatives Often Avoid Inheritance Tax

Spouses almost always receive assets tax-free, while children and grandchildren often pay little to nothing. However, more distant relatives and unrelated beneficiaries may be subject to higher tax rates, sometimes reaching 16%. These rules vary by state, which makes proper estate planning critical.
Tax Rates Depend On Both The Heir And The State

No universal rate applies here. Some states charge as little as 1%, while others tax distant heirs at significantly higher percentages. For instance, in Nebraska, a niece or nephew inheriting more than $40,000 is taxed at 11%. Understanding these brackets can help beneficiaries prepare financially.
Maryland Enforces Both Estate And Inheritance Taxes

Maryland is one of the few states with both estate and inheritance taxes. The estate tax only affects estates above a certain threshold, while the inheritance tax applies only to non-exempt beneficiaries. Spouses, children, direct descendants, parents, grandparents, siblings, stepchildren, and stepparents are exempt. However, others face a 10% inheritance tax.
Filing Deadlines Range From 9 To 18 Months

Most states require inheritance tax payments within nine to eighteen months after assets are transferred. Missing the deadline can lead to penalties or interest charges. Proper planning and professional guidance can help beneficiaries avoid unnecessary financial setbacks.
Some Heirs And Organizations Receive Tax Exemptions

Charities, religious institutions, and nonprofit organizations often receive inherited assets tax-free. Many states also exempt educational institutions. If considering charitable donations, confirming eligibility for tax-free transfers can maximize the impact of a bequest while reducing taxable obligations for heirs.
Strategic Planning Can Reduce Or Eliminate Tax Liability

Inheritance tax isn’t inevitable. Individuals can legally reduce it by setting up trusts, gradually gifting assets, or restructuring ownership while still alive. Proper estate planning ensures beneficiaries receive a larger share of the wealth without excessive taxation.
Tax Laws Are Always Changing

Legislation shifts over time. Iowa eliminated its inheritance tax on January 1, 2025, setting a precedent that other states may follow. Exemptions and rules frequently evolve, so by staying informed, you can make better decisions when managing or receiving an inheritance.