Receiving an inheritance often brings mixed emotions. While it can offer financial relief, it also raises one important question: Are there taxes on inheritance? Inheritance tax rules in the United States can feel confusing at first, yet knowing the essentials makes it easier to handle your financial decisions wisely.
What Is an Inheritance Tax?
Inheritance tax is a state-imposed tax that applies when someone inherits money, property, or other assets from a deceased person. The beneficiary, not the estate, is responsible for paying it. The United States does not have a federal inheritance tax, but a few states still collect one. As of 2025, only Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania levy this tax, while Iowa is in the process of repealing it.
How Inheritance Taxes Work
Whether you owe taxes on inheritance depends largely on where the deceased person lived or owned property, not where you live. If they lived in a state with an inheritance tax, the value of what you receive and your relationship to them would determine how much you pay.
Close family members like spouses, children, parents, and siblings often receive full or partial exemptions from inheritance tax. Many states follow a sliding scale system where the tax rate decreases with closer family ties. Those who are more distantly related or not related at all usually pay higher rates.
For example, Kentucky exempts spouses, parents, children, and siblings, while other relatives may pay between 4% and 16%. In Maryland, immediate family and charities are exempt, and other beneficiaries pay a flat 10%. Nebraska charges 1% for close relatives on inheritances exceeding $100,000, but unrelated heirs may pay up to 15%. New Jersey has rates from 11% to 16% depending on the relationship and amount, while Pennsylvania applies rates of 4.5%, 12%, or 15%.
Inheritance Tax vs. Estate Tax
Although both taxes deal with assets passed on after death, they apply differently. The estate tax is taken from the estate before any distribution occurs, while the inheritance tax applies to the individuals receiving the assets.
At the federal level, only the estate tax applies, not an inheritance tax. In 2025, this tax affects estates worth more than $13.6 million per individual. Because of this high threshold, most Americans never owe federal estate taxes.
Some states, such as Maryland, collect both estate and inheritance taxes, which means an estate can technically face both under certain conditions.
Do I Owe Taxes on Inheritance from Another Country?
If you receive a foreign inheritance, you generally do not owe U.S. federal taxes on it. The Internal Revenue Service (IRS) does not tax inheritances or gifts received from foreign sources. However, you must report them if they exceed $100,000 in total within a year.
To do this, you file Form 3520 with the IRS. This is an informational return, not a tax payment. Still, failing to report can lead to serious penalties.
If the inheritance is held in a foreign bank account, you may also need to file an FBAR (Foreign Bank Account Report) or a FATCA report (Form 8938). These reports are required for transparency and do not add any extra taxes.
It’s also important to remember that some U.S. states might have their own tax rules for foreign inheritances, so checking with a tax professional is always a good idea.
Reducing or Avoiding Inheritance Taxes
Most Americans will never have to pay an inheritance tax, but for those who do, proper planning can minimize the burden. Several strategies can help:
- Gifting while alive: The IRS allows individuals to give up to $19,000 per person per year (or $38,000 for married couples) without triggering a gift tax. This reduces the overall size of the taxable estate.
- Using a trust: Placing assets in an irrevocable trust removes them from your estate, potentially lowering or eliminating inheritance tax liability. Once assets are in the trust, you no longer own them directly, which helps avoid taxation later.
- Charitable giving: Donations to recognized charities are usually exempt from inheritance and estate taxes.
- Relocating: Some individuals choose to move to a state without an inheritance tax if they have large estates and want to protect their heirs from future taxes.
These strategies can significantly help, particularly in states with steep tax rates or fewer exemptions. Still, working with a tax professional is crucial to staying compliant with both state and federal regulations.
Taking Control of Your Legacy
Understanding taxes on inheritance helps protect the wealth you’ve built over time. Estate planning goes beyond deciding how assets are divided. It also focuses on making sure your loved ones benefit fully while avoiding unnecessary financial hurdles. If you reside in a state that enforces an inheritance tax, planning can greatly reduce future stress. Creating a solid estate plan, communicating your wishes with family, and consulting a trusted tax or financial advisor can safeguard your legacy. Since tax laws often change, keeping yourself informed ensures you handle inheritance, estate, and income taxes with confidence.