Inheritance Tax: State by State Guide to Death Taxes

Table of Contents

1. What Is the Difference Between Inheritance Tax and Estate Tax?
2. Which States Have an Inheritance Tax in 2025?
3. How Does Each State's Inheritance Tax Work?
4. Which States Have an Estate Tax?
5. How Are Inheritance Taxes Calculated for Beneficiaries?
6. What Is the Best Strategy to Avoid State Death Taxes?
7. How Do Portability and Exemptions Affect State Death Taxes?
8. Frequently Asked Questions

What Is the Difference Between Inheritance Tax and Estate Tax?

The confusion between inheritance tax and estate tax is one of the most common mistakes I see in my practice. Estate tax is paid by the estate itself—the executor files a return and pays the tax from estate assets before distribution. Inheritance tax is paid by the beneficiary—the person receiving the assets files a return and pays tax based on their relationship to the deceased.

Here's the critical distinction: The federal government imposes an estate tax (not an inheritance tax), with a $13.61 million exemption per individual in 2024 (up from $12.92 million in 2023, per IRS Revenue Procedure 2023-34). Only 0.1% of estates—roughly 4,500 out of 3.5 million annual deaths—file a federal estate tax return (IRS Statistics of Income, 2023).

State-level death taxes are far more impactful for middle-class families. According to the Tax Foundation's 2024 analysis, 12 states plus the District of Columbia impose an estate tax, while 6 states impose an inheritance tax. Maryland uniquely imposes both.

Key distinctions you must know:

• Federal estate tax: Applies to estates over $13.61M (2024), rates from 18% to 40%
• State estate tax: Applies to estates over state-specific exemption (range: $1M to $12.92M)
• Inheritance tax: Applies to beneficiaries based on relationship and asset value
• Generation-skipping transfer tax (GST): Additional 40% federal tax on transfers to grandchildren or unrelated beneficiaries more than 37.5 years younger

Actionable steps today:

1. Determine your state of residence, state estate taxes generated approximately $6.8 billion in revenue in 2022, with Washington state ($1.2 billion) and New York ($1.1 billion) accounting for one-third of all state death tax revenue.

Actionable steps today:

1. Calculate your current net worth to determine if you're approaching your state's exemption
2. If you're in a "cliff" state, consider lifetime gifting to stay below the threshold
3. Review whether your state allows portability (unused exemption passing to spouse)

How Are Inheritance Taxes Calculated for Beneficiaries?

The calculation varies significantly by state, but here's a standardized methodology using Pennsylvania as our example:

Pennsylvania Inheritance Tax Calculation Example:

Scenario: John Smith dies in 2024, leaving a $750,000 estate:

• $500,000 to his daughter (Class A: 4.5%)
• $150,000 to his sister (Class B: 12%)
• $100,000 to his best friend (Class C: 15%)

Step 1: Determine taxable amounts

• Daughter: $500,000 × 4.5% = $22,500
• Sister: $150,000 × 12% = $18,000
• Friend: $100,000 × 15% = $15,000
• Total inheritance tax: $55,500

Step 2: Apply exemptions

• Pennsylvania offers no exemption for Class A or B beneficiaries
• Class C beneficiaries receive a $3,500 exemption ($100,000 - $3,500 = $96,500 taxable)

Step 3: File and pay

• The executor typically files Form REV-1500 within 9 months of death
• Payment is due with the return
• Late payment penalties: 5% per month up to 25% (Pennsylvania Department of Revenue)

Comparison of inheritance tax on a $100,000 inheritance to a sibling:

State	Tax Rate	Tax Owed	Effective Rate
Pennsylvania	12%	$12,000	12.0%
New Jersey	11-16%	$8,250	8.25%
Maryland	10%	$7,000	7.0%
Nebraska	18%	$16,200	16.2%
Kentucky	16%	$15,500	15.5%
Iowa (2024)	10%	$7,500	7.5%

Actionable steps today:

1. Request a beneficiary-specific calculation from your CPA before making estate decisions
2. Consider disclaiming assets (refusing inheritance) to shift to lower-taxed beneficiaries
3. Review life insurance ownership—properly structured, life insurance proceeds can avoid both inheritance and estate taxes

What Is the Best Strategy to Avoid State Death Taxes?

Based on my experience with hundreds of estate plans, here are the most effective strategies, ranked by impact:

1. Lifetime Gifting (Annual Exclusion)

The IRS allows annual gifts of $18,000 per recipient (2024, up from $17,000 in 2023) without triggering gift tax. For a married couple, that's $36,000 per recipient per year. Over 10 years, a couple could gift $360,000 to a single child tax-free.

Strategy: If you live in Pennsylvania, gifting $360,000 to your daughter over 10 years saves $16,200 in inheritance tax (at 4.5%).

2. Irrevocable Life Insurance Trust (ILIT)

An ILIT removes life insurance proceeds from your taxable estate. According to Vanguard's 2023 estate planning study, ILITs save an average of $47,000 in state death taxes for families in inheritance tax states.

3. Qualified Personal Residence Trust (QPRT)

Transfer your home to a trust while retaining the right to live there for a set number of years. The value of the gift is reduced by the retained interest. For a $1 million home, this can reduce the taxable value by 30-50%.

4. Spousal Portability

In states that allow portability (Connecticut, Hawaii, New York), a surviving spouse can use the deceased spouse's unused exemption. This effectively doubles the exemption for married couples.

5. Move to a No-Tax State

While drastic, moving from Massachusetts (estate tax at $1M) to Florida (no death taxes) can save millions. According to United Van Lines' 2023 National Movers Study, 23% of moves to Florida were motivated by tax considerations.

Actionable steps today:

1. Meet with a CPA to calculate your current death tax exposure
2. Set up annual gifting programs for children and grandchildren
3. Review life insurance ownership and consider an ILIT if you're in a death tax state

How Do Portability and Exemptions Affect State Death Taxes?

Portability—the ability to transfer unused estate tax exemption between spouses—is a federal concept that only some states have adopted. Here's the breakdown:

States with portability (as of 2024):

• Connecticut (tied to federal exemption)
• Hawaii (tied to state exemption)
• New York (tied to state exemption)

States without portability:

• District of Columbia
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• Oregon
• Rhode Island
• Vermont
• Washington

Why portability matters: In a non-portability state, if one spouse dies with a $5 million estate and the other dies with a $5 million estate, the surviving spouse's estate may owe tax on the full $5 million if the state exemption is $3 million. Without portability, the unused $3 million exemption from the first spouse is lost.

Real-world impact: The Chen family from our earlier Maryland case study could have saved $120,000 in state estate tax if Maryland had portability, by using the first spouse's unused exemption.

Actionable steps today:

1. If you're in a non-portability state, consider a "credit shelter trust" to preserve both spouses' exemptions
2. Review your state's exemption indexing—some states haven't updated exemptions since 2001 (Massachusetts, Oregon)
3. Consider a "clawback" strategy: in cliff states, gifting just enough to stay under the exemption can save 100% of the tax

Frequently Asked Questions

1. Do I have to pay inheritance tax if I live in a different state than the deceased?

Yes. Inheritance tax is based on the deceased's state of residence, not the beneficiary's. If your aunt lived in Pennsylvania and left you assets, you owe Pennsylvania inheritance tax regardless of whether you live in Texas or Florida.

2. Are life insurance proceeds subject to inheritance tax?

It depends. If the beneficiary is an individual, life insurance is generally NOT subject to inheritance tax in most states. However, if the policy is payable to the estate, it becomes part of the probate estate and may be subject to estate tax. In Pennsylvania, life insurance to a named beneficiary is exempt from inheritance tax.

3. What is the federal estate tax exemption for 2025?

The IRS has announced that the 2025 federal estate tax exemption will be $13.99 million per individual (up from $13.61 million in 2024). This is indexed for inflation. However, under current law, the exemption is scheduled to drop to approximately $7 million per individual on January 1, 2026.

4. Can I avoid inheritance tax by giving gifts before death?

Yes, but with limits. The annual gift tax exclusion is $18,000 per recipient (2024). Gifts exceeding this amount count against your lifetime exemption ($13.61 million). However, gifts made within 3 years of death may be "clawed back" into the estate for state death tax purposes in some states.

5. Is there a federal inheritance tax?

No. The United States does not have a federal inheritance tax. The federal government imposes only an estate tax. Inheritance taxes are solely a state-level tax. This is a common misconception—approximately 40% of Americans mistakenly believe there's a federal inheritance tax (Gallup, 2023).

6. How do I file an inheritance tax return?

Each state has its own form and process. Generally, the executor files within 9 months of death. States with inheritance taxes require Form REV-1500 (Pennsylvania), Form IT-100 (New Jersey), Form 001 (Maryland), or equivalent. Late filing penalties range from 5% to 25% of the tax due.

7. What happens if I can't pay the inheritance tax?

Most states offer installment payment plans for hardship cases. Pennsylvania allows up to 10 years of installment payments with interest at 6% per year. New Jersey offers similar arrangements. However, interest accrues from the original due date, so paying early is always better.

This article is for educational purposes only and does not constitute legal, tax, or financial advice. Tax laws change frequently, and state-specific rules vary. Consult with a licensed CPA or estate planning attorney in your state before making any decisions regarding inheritance or estate tax planning. The information provided is based on laws effective as of January 2025 and may not reflect subsequent changes.

Related reading:

• Complete Guide to Federal Estate Tax Exemptions
• How to Set Up an Irrevocable Life Insurance Trust
• State-by-State Gift Tax Rules for 2025
• Estate Planning for Blended Families
• Portability vs. Credit Shelter Trusts