Educational guide — not tax or legal advice. Tax rules change. Consult a CPA or estate attorney about your specific situation.
The plain-English distinction
Two taxes with similar names but different mechanics:
Estate tax
- Paid by: The estate (before distribution to heirs)
- Calculated on: The total value of the deceased’s estate above the exemption threshold
- Who writes the check: The executor, from estate assets
- What heirs actually receive: Whatever’s left after the estate tax is paid
The estate tax is essentially a “transfer tax” on large estates passing from one generation to the next. For most estates it doesn’t apply because the exemption is high.
Inheritance tax
- Paid by: Each heir (after receiving the inheritance)
- Calculated on: The amount each heir receives, often with rates depending on relationship to the deceased
- Who writes the check: The heir
- What heirs actually receive: The gross amount minus their own inheritance tax payment
Inheritance tax is essentially a “receipt tax” on the heir. The rate often depends on how closely related the heir is to the deceased — spouses and children typically pay less or nothing; siblings, friends, and unrelated heirs typically pay more.
The key practical difference: an estate tax bill reduces what’s left for everyone; an inheritance tax bill is paid by each individual heir based on their share.
The federal picture
Federal estate tax exists, but only affects very wealthy estates
The federal estate tax has been around in various forms since 1916. The basic exclusion amount is set by 26 U.S.C. §2010(c)(3)(A), which reads: “the basic exclusion amount is $15,000,000.” Under §2010(c)(3)(B) that figure is indexed for inflation for decedents dying in any calendar year after 2026, measured against calendar year 2025 and rounded to the nearest $10,000.
| Year of death | Basic exclusion amount | Source |
|---|---|---|
| 2026 | $15,000,000 | 26 U.S.C. §2010(c)(3)(A) |
| 2027 and later | $15,000,000 indexed for inflation | 26 U.S.C. §2010(c)(3)(B) |
- Married couples. §2010(c)(2) makes a surviving spouse’s applicable exclusion the basic exclusion amount plus the deceased spousal unused exclusion amount, which §2010(c)(4) defines as the unused portion of the last deceased spouse’s exclusion — so two full exclusions can be applied across a couple. §2010(c)(5)(A) attaches a condition: the amount may not be taken into account unless the executor of the deceased spouse’s estate files an estate tax return computing it and elects on that return that it may be taken into account. The election is irrevocable once made, and no election may be made on a return filed after the time prescribed by law, including extensions.
- Top tax rate: 40% on the amount over $1,000,000 (26 U.S.C. §2001(c)).
Only estates above the exclusion owe federal estate tax. Below it, no federal estate tax is due.
26 U.S.C. §2010(c)(3)(A) was amended to read “the basic exclusion amount is $15,000,000” by Pub. L. 119-21, title VII, §70106(a), July 4, 2025, 139 Stat. 162 (the 2025 reconciliation act, commonly called the One Big Beautiful Bill Act), and §2010(c)(3)(B) indexes it for decedents dying after 2026. The section it replaced had been amended by Pub. L. 115-97, §§11002(d)(1)(CC) and 11061(a), December 22, 2017. No expiration date appears on the face of §2010(c)(3) as it now reads; the amending act’s own provisions are not restated here.
The exclusion figures above are taken from the sections cited beside them, not from a secondary summary.
There is no federal inheritance tax
The federal government does not impose an inheritance tax. Heirs don’t owe federal income tax on inherited property in most cases either.
- An inherited house, savings account, or investment account is not federally taxable income to the heir.
- Inherited retirement accounts (IRAs, 401ks) are taxable when distributions are taken, not at the moment of inheritance. For a defined contribution plan, 26 U.S.C. §401(a)(9)(H)(i) applies the distribution rule “by substituting 10 years for 5 years”, and §401(a)(9)(H)(ii) exempts an eligible designated beneficiary — a category §401(a)(9)(E)(ii) defines to include the surviving spouse.
- The stepped-up cost basis for inherited property usually eliminates capital gains tax on appreciation that occurred during the deceased’s life. See Do You Pay Inheritance Tax on a House?.
State-by-state landscape
This is where it gets complicated. States have their own rules:
States with their own estate tax
Twelve states plus DC impose a state-level estate tax on top of (or instead of) the federal estate tax, and their thresholds are far below the federal exclusion. Each figure below was read in the section cited beside it:
| State | Threshold | Source |
|---|---|---|
| Oregon | $1,000,000 — the rate table in §118.010(4) begins there, at 10% of the excess above it | ORS 118.010(4) |
| Massachusetts | $2,000,000 — §2A(g) relieves estates of decedents dying on or after 1 January 2023 from the tax “if the value of the federal taxable estate is not more than $2,000,000”. §2A(f) caps the credit at $99,600 | Mass. Gen. Laws ch. 65C, §2A(f), (g) |
| Washington | $3,076,000 for deaths on or after 1 January 2026 and before 1 July 2026; $3,000,000 from 1 July 2026, indexed annually from 2027 | RCW 83.100.020(1)(a)(ix)–(xi) |
| Maryland | $5,000,000 for a decedent dying on or after 1 January 2019, plus any deceased spousal unused exclusion calculated under §7-309(b)(9) | Md. Code, Tax-Gen. §7-309(b)(3)(i)6 |
| Minnesota | $3,000,000 for decedents dying in 2020 and thereafter — a flat figure, not indexed | Minn. Stat. §291.016, subd. 3(b)(4) |
| Vermont | $5,000,000, with 16% on the excess — a flat figure, not indexed | 32 V.S.A. §7442a(b) |
| Maine | A statutory base of $5,600,000 for deaths on or after 1 January 2018 (§4102(5)), which §4119 then indexes each year, so the amount in force for a given year is higher than the base and is published by the assessor rather than stated in the statute. The brackets above it are 8%, 10% and 12% | 36 M.R.S. §4102(5), §4119; rates at §4103 |
| Rhode Island | Set as a credit rather than an exemption, and republished by the Division of Taxation each January; the statute itself states no current threshold | R.I. Gen. Laws §44-22-1.1 |
Illinois, Hawaii, New York, Connecticut and the District of Columbia also impose an estate tax, and their thresholds are not stated here. Their statutes could not be read at source when this page was last verified, and a figure we have not read at its source does not go on the page.
A top rate is set separately by each state’s own schedule; no single range covering all of them is stated here.
If you live in or own real estate in one of these states, the state estate tax may apply even if the federal estate tax doesn’t.
States with inheritance tax
Five states impose an inheritance tax on a death today — Pennsylvania, New Jersey, Kentucky, Maryland and Nebraska. Iowa’s chapter 450 is included in the table below because it appears in the same list historically, but §450.98 no longer applies it to a death on or after 1 January 2025:
| State | What the statute provides | Source |
|---|---|---|
| Kentucky | Class A — spouse, parent, child, grandchild, sibling, niece and nephew, including of the half blood — is exempt on the total inheritable interest. Class B (in-laws, aunt, uncle, and a great-grandchild who is the grandchild of a child by blood, of a stepchild or of a child adopted during infancy) runs 4% to 16% across eight bands after a $1,000 exemption; Class C (institutions not exempt under §140.060, and everyone else) runs 6% to 16% across six bands after a $500 exemption. §140.080(1) charges each exemption against the lowest bracket. Both sections were amended by 2026 Ky. Acts ch. 198, effective 27 April 2026, applying to estates of decedents dying on or after 1 January 2026 | KRS §140.060; §140.070(1)–(3); §140.080(1)(a)–(d), (2) |
| Maryland | 10% of the clear value of the property that passes | Md. Code, Tax-Gen. §7-204(b) |
| Nebraska | 1% of the clear market value received by each person in excess of $100,000, for decedents dying on or after 1 January 2023 — $40,000 for deaths before that date under §77-2004(1)(a). §77-2004(2) sets the class: father, mother, grandfather, grandmother, brother, sister, son, daughter, a child legally adopted as such, any lineal descendant, any lineal descendant legally adopted as such, any person to whom the deceased stood in the acknowledged relation of a parent for not less than ten years before death, that person’s lineal descendants, and the spouse or surviving spouse of anyone in the class. §77-2004(3) also exempts the homestead allowance, exempt property and family maintenance allowance from the tax | Neb. Rev. Stat. §77-2004(1)(a), (1)(b), (2), (3) |
| Iowa | No inheritance tax at all for a death on or after 1 January 2025 — no rate, no class table, no heir liable. §450.98 reads: “Effective January 1, 2025, this chapter shall not apply to property of estates of decedents dying on or after January 1, 2025. The inheritance tax shall not be imposed under this chapter in the event the decedent dies on or after January 1, 2025.” Iowa has no estate tax either. Both repeals were enacted by 2021 Iowa Acts, ch. 177 — §§12, 15 and 16 for §450.98 and §§13, 15 and 16 for §450B.8, which the Code notes applies retroactively to the estates of decedents dying on or after 1 January 2021 | Iowa Code §450.98; §450B.8 |
| Pennsylvania | Rates not stated here — see below | — |
| New Jersey | Rates not stated here — see below | — |
Pennsylvania’s and New Jersey’s rate schedules are not stated on this page. Neither state’s statute could be read at source when this page was last verified, and a rate we have not read at its source does not go on the page.
Each state sets its own classes, and they do not line up. KRS §140.070(1) places a sibling, niece and nephew in Kentucky’s Class A, and §140.080(1)(b) exempts Class A on the total inheritable interest — so those heirs pay nothing in Kentucky. Read the schedule for the state in question rather than carrying a class across state lines.
Pennsylvania’s inheritance tax reaches real and personal property located in Pennsylvania, whoever the decedent was a resident of; the rate schedule is not stated here because it was not read at source.
Maryland is unusual
Maryland has both an estate tax (Md. Code, Tax-Gen. §7-309(b)(3)(i)6: $5,000,000 for deaths on or after 1 January 2019, plus any deceased spousal unused exclusion) and an inheritance tax (§7-204(b): 10% of clear value). Most heirs are exempt from the inheritance tax — only collateral relatives and unrelated heirs pay it.
States with neither
Counting the two lists on this page — twelve states plus DC with an estate tax, and five with an inheritance tax, with Maryland appearing in both — sixteen states impose one or the other. The remaining 34 US states have neither a state estate tax nor a state inheritance tax. Heirs in these states owe no state-level tax on inheritance — only the federal estate tax if the federal threshold is exceeded.
What does it mean for your planning?
A few honest scenarios:
Most middle-class American households
- No federal estate tax: the estate is far below the §2010(c)(3)(A) basic exclusion
- No federal inheritance tax (doesn’t exist)
- No state estate tax if you’re in a state without one
- No state inheritance tax if you’re in a state without one
For most Americans, neither tax applies. Estate planning is about probate avoidance, beneficiary designations, and family clarity — not tax planning.
Households approaching the state thresholds but not the federal exclusion
- Federal estate tax: not unless the estate exceeds the §2010(c)(3)(A) basic exclusion
- State estate tax: may apply in some states (MA, OR, WA, MN, IL, RI, VT, ME, MD)
- State inheritance tax: may apply if deceased lived in PA, NJ, KY, MD
For these households, state estate or inheritance tax may be more impactful than federal estate tax. State-specific planning can matter.
Households above the federal basic exclusion
- Federal estate tax: likely applies above the exemption
- State estate tax: may apply
- Planning becomes meaningful — irrevocable trusts, generation-skipping trusts, gifting strategies, business succession planning
For these households, working with a specialist estate planning attorney is usually money well spent.
The thresholds that determine which tax applies
The questions each threshold asks, in the order they apply:
- Is the total estate above the basic exclusion — $15,000,000 under 26 U.S.C. §2010(c)(3)(A)? If yes, federal estate tax may apply.
- Do you live in (or own real estate in) a state with state estate tax? If yes, check the threshold.
- Do you live in PA, NJ, KY, or MD? (or are you inheriting from someone who did?) If yes, state inheritance tax may apply based on your relationship.
Where none of the three applies, neither an estate tax nor an inheritance tax is imposed.
Practical tax-reduction strategies (high level)
For households where tax actually applies:
- Lifetime gifting: 26 U.S.C. §2503(b)(1) sets a statutory annual exclusion of $10,000 per recipient for present-interest gifts, and §2503(b)(2) increases it by the §1(f)(3) cost-of-living adjustment (substituting calendar year 1997 for 2016), rounded down to the next lowest multiple of $1,000 — so the figure in force is published rather than stated in the section. For calendar year 2026 the published figure is $19,000 per recipient (IRS, Rev. Proc. 2025-32, §4.42(1)), and §4.42(2) sets a separate $194,000 exclusion for gifts to a spouse who is not a US citizen (§§2503, 2523(i)(2)). Two spouses therefore have two $19,000 exclusions against the same recipient — $38,000 — which §2513(a)(1) also permits to be claimed on a gift made by one of them alone, treated as made one-half by each, but only where each spouse is a US citizen or resident at the time of the gift and, under §2513(a)(2), only where both spouses consent. Gifts within the exclusion do not reduce the basic exclusion amount. Tuition and medical expenses paid directly to the institution, gifts to a spouse, and gifts to qualifying charities are excluded separately.
- Irrevocable life insurance trust (ILIT): removes life insurance death benefit from the taxable estate.
- Generation-skipping trust: passes assets to grandchildren in a tax-advantaged way (subject to the GST exemption).
- Charitable remainder trust (CRT): provides income during life with the remainder going to charity, reducing the taxable estate.
- Family limited partnerships: can reduce the valuation of business interests for estate tax purposes.
- State residency planning: moving from a state with estate or inheritance tax to one without can substantially reduce taxes. (Note that simply changing your “domicile” requires real lifestyle changes — voter registration, driver’s license, primary residence, time spent in the new state.)
These are advanced strategies. Don’t implement any of them without working with a qualified estate planning attorney and tax advisor.
Common questions
Will my heirs owe income tax on what they inherit? Generally no for cash, real estate, and most other property. Yes for retirement accounts (distributions are taxable; 26 U.S.C. §401(a)(9)(H)(i) requires most non-spouses to distribute within 10 years).
Does my will affect estate tax? The structure of the will and how you leave assets can affect estate tax in some cases. For example, leaving everything to your spouse uses the unlimited marital deduction (no estate tax at the first death). For most middle-class estates this doesn’t matter; for large estates it can matter substantially.
Does a trust avoid estate tax? A revocable living trust does NOT reduce estate tax. The assets are still in your estate for tax purposes because you control the trust.
An irrevocable trust can reduce estate tax because you give up control of the assets — they’re no longer in your taxable estate. But irrevocable trusts are exactly what they say: irrevocable. You can’t change your mind.
What about state inheritance tax on life insurance? Most states exempt life insurance from inheritance tax if it’s paid directly to a named beneficiary (not the estate). Pennsylvania specifically exempts life insurance.
What about retirement accounts and estate tax? Inherited retirement accounts are included in the deceased’s estate for estate tax purposes (if above the exemption). The income tax on distributions is separate and paid by the beneficiary as they take distributions.
Will the federal estate tax exemption really drop? No. 26 U.S.C. §2010(c)(3)(A) now reads “the basic exclusion amount is $15,000,000”, with §2010(c)(3)(B) indexing it for decedents dying in any calendar year after 2026. The figure was put there by Pub. L. 119-21, §70106(a), July 4, 2025, and §2010(c)(3) carries no expiration date on its face.
Related reading
- Do You Pay Inheritance Tax on a House?
- Is Life Insurance Taxable to the Beneficiary?
- What Is Estate Planning? The Documents and What Each Does
- Will vs. Trust: How They Differ
- What Is Probate
- How to Avoid Probate
- Estate Planning Checklist
Educational information only — not tax, legal, or financial advice. Tax rules change. Consult a CPA or estate attorney about your specific situation. Sources, each read at the section cited beside the figure it supports: 26 U.S.C. §§2001(a)–(c), 2010(c), 1014(a), 2032(a), 401(a)(9)(H), 2503(b), 2513(a); IRS Rev. Proc. 2025-32, §4.42 (read at irs.gov/pub/irs-drop/rp-25-32.pdf, 27 September 2026); ORS 118.010; Mass. Gen. Laws ch. 65C §2A; RCW 83.100.020; Md. Code, Tax-Gen. §§7-204, 7-309; Minn. Stat. §291.016; 32 V.S.A. §7442a; 36 M.R.S. §4103; R.I. Gen. Laws §44-22-1.1; KRS §§140.060, 140.070, 140.080 (read 27 September 2026, each as amended by 2026 Ky. Acts ch. 198 effective 27 April 2026); Neb. Rev. Stat. §77-2004; Iowa Code §§450.98, 450B.8. Illinois, Hawaii, New York, Connecticut, the District of Columbia, Pennsylvania and New Jersey are not stated on this page because their statutes could not be read at source.