Both taxes are often lumped together as “death taxes,” and not every state has death taxes. In fact, only six states charge an inheritance tax. Even if your state has an inheritance tax, you may not have to pay it. Keep reading to learn more.

States With an Inheritance Tax

The U.S. states that collect an inheritance tax include:

IowaKentuckyMarylandNebraskaNew JerseyPennsylvania

Each state has its own laws dictating who is exempt from the tax, who will have to pay it, and how much they’ll have to pay. Maryland imposes both an estate tax and an inheritance tax. New Jersey did as well until its estate tax was repealed in 2018. Iowa is also phasing out the inheritance tax which it plans to eliminate completely by 2025. State rules usually include thresholds of value for the estate to determine if a death tax should be paid. Estates that fall below these exemption amounts aren’t subject to taxes in the state. For example, let’s say you’re 25 years old and inherit $100,000 from your family friend, but your state has an exemption of $25,000. You would only pay inheritance tax on $75,000. Iowa is one of the states that doesn’t impose an inheritance tax when a net estate is valued at $25,000 or less. Nebraska is another state with exemption amounts, and it doesn’t charge an inheritance tax if the beneficiary is under the age of 22.

State Inheritance Tax Rates and Exemptions

However, most estates will not have to pay the federal estate tax and file an estate tax return. A federal estate tax is only applied to the part of the gross estate that exceeds the lifetime exclusion, which is $12.06 million for tax year 2022, and $12.92 million for tax year 2023. Other inheritances may be taxed if they are required to be included with the heir or beneficiaries’ taxable income. Certain retirement accounts, such as 401(k)s and IRAs, are taxed as income, but only when withdrawals are made from the accounts by the beneficiary. And if you inherit property or assets that generate income or interest, that income or interest is typically taxable to you after you take possession of the bequest.

Is Your Inheritance Subject to a State Tax?

If the deceased person lived in a state with an inheritance tax, you could be subject to that state’s tax. The other instance is if a bequest—such as real estate—is physically located there.

How the Inheritance Tax Works

Let’s say you live in California—which does not have an inheritance tax—and you inherit from your uncle’s estate. He lived in Kentucky at the time of his death. You would owe Kentucky a tax on your inheritance because Kentucky is one of the six states that collect a state inheritance tax. The flip side is if you live in Kentucky and your uncle lived in California at the time of his death. Your inheritance would not be subject to taxation in this case because California hasn’t collected an inheritance tax since 1982. Assuming your inheritance isn’t physically located in Kentucky, it wouldn’t be subject to that state’s tax even though you live there. You would be subject to Kentucky’s inheritance tax if your uncle was a California resident who owned the property in Kentucky that you were inheriting because your bequest is physically located there. But if you inherited an asset that was located in California, your inheritance would not be affected by the fact he owned other property elsewhere. Let’s say you inherit cash instead, valued at $250,000. Based on Kentucky’s inheritance tax rates and exemptions, as the niece or nephew of your uncle, you’d owe an inheritance tax worth $22,960 plus 16% of the amount over $200,000 (so 16% of $50,000). The tax would work out to $30,960. You’d get to keep $219,040.

None of the six states with an inheritance tax impose it on surviving spouses. New Jersey exempts domestic partners as well, and Maryland has exempted jointly-held primary residences inherited from domestic partners since July 1, 2009. Descendants—children and grandchildren—aren’t taxed, either, in four of the six states that impose this tax. Nebraska and Pennsylvania are the exceptions. Your inheritance would be subject to the Pennsylvania inheritance tax if you inherited from your father and he lived there. Nebraska also doesn’t charge an inheritance tax if the beneficiary is under the age of 22. Your inheritance would not be subject to a Kentucky inheritance tax if you’re the decedent’s spouse, son, daughter, or grandchild. As the decedent’s niece or nephew, however, you’d pay an inheritance tax, and if you were not related at all, you’d pay the highest inheritance tax rate.

How Inheritance Tax Is Calculated and Paid

You might not have to deal with personally sending a check to the state taxing authority if your gift is subject to an inheritance tax. The executor of the estate will most likely calculate the tax due on each individual bequest from the estate based on that state’s applicable rate for each beneficiary, then subtract what you owe from the amount of your bequest. But this only works if you inherit cash. You’d receive a check for the balance. You’ll probably have to pay out of pocket if you inherit a tangible asset. Although, some decedents will leave instructions in their wills that the estate will pick up any inheritance tax that’s owed by each beneficiary.

The Bottom Line

An heir’s inheritance will be subject to a state inheritance tax only if two conditions are met: The deceased person lived in a state that collects a state inheritance tax or owned bequeathed property located there, and the heir is in a class that isn’t exempt from paying the tax. The state where the heir lives is irrelevant.