Picture a scenario straight from a dramatic movie plot: A distant relative, with no spouse or children, decides to leave you their entire estate. Excitement is natural—maybe you’re already daydreaming about what to do with the windfall. But there’s a potential curveball many people overlook: inheritance taxes. In some states, these can take a sizeable bite out of your newfound fortune, leaving you with less than expected. Below, you’ll find out how inheritance taxes are calculated, which states levy them, and whether you might be exempt.
The Basics: How Much Might You Owe?
Inheritance tax rates vary from one state to another, and it also matters how close you were to the person who passed away. Spouses and kids often get preferential rates—or in some states, no inheritance tax at all. But if you’re a friend, sibling, or more distant relative, you might see a higher tax percentage.
For instance, suppose someone in Maryland leaves you a $200,000 inheritance. Maryland’s inheritance tax is set at 10%, so you’d owe $20,000 in taxes. In other words, a chunk of that estate goes to the state government before you see the rest. The exact tax rate depends on the specific state and the relationship between you and the decedent (the person who died).
Below are some typical inheritance tax ranges in states that still have it:
- Iowa: 2% – 6%
- Kentucky: 4% – 16%
- Maryland: 10%
- Nebraska: 1% – 18%
- New Jersey: 11% – 16%
- Pennsylvania: 4.5% – 15%
Note that each state sets thresholds, exemptions, and brackets. If you cross that threshold, you’ll owe tax. If your portion is under a certain limit, you might not.
Who Must Pay Inheritance Tax?
The crucial detail is the decedent’s location rather than yours. So, if you live in Florida but inherit from someone in Kentucky, you might be on the hook for Kentucky’s inheritance tax. Typically, an estate attorney or the executor will confirm the decedent’s last state of legal residence and handle the appropriate filings, but the actual tax burden can fall on you as the beneficiary.
It’s also common for states to offer a reduced rate—or even no inheritance tax—for spouses or immediate family. Sometimes, extended family members get taxed at a lower rate than non-relatives, but that depends on how a particular state’s laws are structured. Other times, only a portion of the inheritance is taxed, or it’s taxed above a certain threshold. For instance, a few states say the first $20,000 or $50,000 is exempt, and then you’re taxed on the remainder.
Other “Death Taxes” to Watch Out For
Inheritance tax isn’t the only levy you might face. Two other types of taxes pop up frequently when someone passes away:
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Estate Tax
This is imposed on the overall estate before assets are distributed. While an inheritance tax targets each individual beneficiary, an estate tax is typically paid by the estate itself. On the federal level, only a small percentage of estates meet the threshold since it’s currently above $13 million. However, around a dozen states (plus Washington, D.C.) have their own estate tax, and these thresholds are generally lower than the federal one—sometimes $1 million or $2 million.
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Capital Gains Tax
If you sell inherited property for a profit, you might owe capital gains tax. For example, say you inherit a $500,000 house, and later you sell it for $600,000. You may owe tax on that $100,000 gain. Usually, the starting basis is the property’s appraised value on the decedent’s date of death, so you’re not taxed on the full property value—just on any profit you make above that.
Common Inheritance Tax Exemptions
Before you panic about losing half your inheritance, remember that each state sets its own exemptions. Here are a few examples:
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Iowa
- Spouses, parents, and direct descendants (children, grandchildren): fully exempt
- Charities: exempt up to $500
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Kentucky
- Immediate family: fully exempt
- Other recipients: can be exempt up to $500 or $1,000, depending on your relationship
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Maryland
- Spouses, kids, and certain close relatives: exempt
- Other heirs: exempt up to $1,000
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Nebraska
- Spouses and charities: exempt
- Close relatives like parents and children: exempt up to $100,000
- Other relatives: exempt up to $40,000
- Non-relatives: exempt up to $25,000
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New Jersey
- Spouses, children, grandchildren, and charities: exempt
- Siblings and sons/daughters-in-law: exempt up to $25,000
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Pennsylvania
- Spouses and minor children: exempt
- Parents, grandparents, adult children: the first $3,500 is exempt
Many states encourage you to pay promptly by offering an “early bird” discount. For instance, Kentucky grants a 5% discount if you file within nine months, and Pennsylvania gives the same discount if you pay within three months.
What If You Can’t Afford the Taxes?
If your inheritance is substantial but you don’t have the cash on hand to cover the tax, this can create a bind. Missing the due date often triggers penalties and interest charges. One option is to file an extension—many states (though not all) will let you postpone the payment deadline. Another tactic is setting up a payment plan. Kentucky, for example, allows a plan to spread out what you owe. That way, you’re not forced to cough up a large sum at once.
If you’re still worried, consider talking to an estate attorney or a financial planner. They can walk you through state-specific guidelines and clarify how to minimize interest or penalty fees.
Avoiding or Reducing Inheritance Tax
By the time you’re reading this, you may have already received your inheritance. In that case, there’s not much you can do to dodge the tax obligations. However, if your loved one is still alive and thinking ahead, they might use certain strategies:
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Gifting
They can gift you part of their assets while they’re still alive. Under current laws, an individual can give away a certain amount each year (often $17,000 or more, depending on changes to limits) without incurring gift taxes. Married couples can usually double that.
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Life Insurance
If the relative buys a policy equal to what you’d inherit, the insurance proceeds typically come to you tax-free upon their death.
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Trusts
Assets placed in an irrevocable trust may avoid inheritance tax. This can be complex to set up, but an estate planning attorney can help tailor something that works best for the family’s situation.
Considering a Probate Cash Advance
Even if you’re okay with paying inheritance tax, the probate process itself can hold up the distribution of assets. If you need money sooner—maybe to handle daily bills or final expenses—an inheritance cash advance might be an option. Unlike a traditional bank loan, it doesn’t hinge on your credit score or income, and you’re not locked into monthly payments. A provider like Rockpoint Probate Funding can release funds upfront, then gets repaid from the estate once everything settles.
If you’re interested in that route, consider giving Rockpoint Probate Funding a call at (323) 484-1063. They’ll walk you through the details and see if a probate cash advance fits your circumstances.
Final Thoughts
Inheritance taxes can certainly cut into what you receive—but not everyone owes them. If your benefactor lived in a state without inheritance tax, or if you were that person’s spouse or child, you might owe little to nothing. Plus, each state sets its own exemptions and thresholds that can lower your tax burden.
Still, it’s wise to plan for the possibility that taxes could be significant. Check your state’s regulations (or the decedent’s state if it’s different from yours), verify any exemptions that apply to your relationship, and stay aware of other taxes (like estate or capital gains) that might come into play. That way, you’ll have a more accurate picture of how much you’ll end up with—before you start spending those inherited funds.
