How do estate taxes affect inherited property?

Inheritance can be a financial blessing, but it can also trigger unexpected tax complications. Whether you’ve received property, cash, or investments, understanding how estate taxes and inheritance taxes apply is essential for protecting what you’ve been given. An experienced estate tax preparer can help you avoid unnecessary liabilities and secure your financial future.

What is inheritance tax? Definition & basics

An inheritance tax is a state-level tax that some beneficiaries may owe after receiving assets from a deceased person’s estate. Unlike federal taxes, inheritance taxes are not imposed by the IRS but by individual states. The tax amount depends on how closely related the heir is to the deceased, the type of assets inherited, and the local tax rules. Immediate family members are often exempt or taxed at lower rates.

Federal versus state inheritance taxes

There is currently no federal inheritance tax in the United States. However, several states impose their own inheritance or estate taxes. In addition, there is a federal estate tax, which is paid by the estate of the deceased before distribution to beneficiaries. It only applies to estates exceeding a certain threshold ($13.61 million per individual or $27.22 million per married couple in 2024). State taxes vary widely and may include:

• Inheritance tax (paid by the beneficiary)
• Estate tax (paid by the estate)
• Gift tax (paid during the giver’s lifetime)

Which states have an inheritance tax?

As of 2025, only five states impose an inheritance tax:

1. Kentucky
2. Maryland
3. Nebraska
4. New Jersey
5. Pennsylvania

Even within these states, the rules vary. Spouses are typically exempt, while other heirs, such as nieces, nephews, or friends, may be taxed at higher rates.

How inheritance tax works

The inheritance tax is calculated after the assets are distributed. Each beneficiary may be taxed based on the value of their individual inheritance and their relationship to the deceased. The more distant the relationship, the higher the potential tax. In contrast, estate tax is calculated and paid by the estate before assets are distributed.

How are inheritance taxes calculated?

Each state sets its own rules and tax rates. Generally, the calculation involves:

• Fair Market Value of the inherited asset
• Relationship to the decedent (closer relations typically receive more exemptions)
• Applicable thresholds (amounts above which tax is due)

Tax rates can range from 1% to over 18% depending on the amount and the heir’s classification.

What are the inheritance tax exemptions and thresholds

Exemptions often apply to:

• Spouses (fully exempt in all states with inheritance tax)
• Children and grandchildren (may have reduced rates or full exemptions)
• Charitable organizations (typically exempt)

Some examples:

• In Nebraska, direct descendants pay 1% on inheritances over $40,000.
• In Pennsylvania, children pay 4.5%, siblings 12%, and others up to 15%.

Iowa has phased out its inheritance tax entirely as of 2025.

What’s the difference between an inheritance tax and an estate tax?

• Inheritance tax is paid by the beneficiary after receiving the assets.
• Estate tax is paid by the estate before the assets are distributed.

Only a handful of states levy inheritance taxes, while others apply estate taxes instead. It’s essential to understand both when creating or inheriting an estate.

Some financial strategies for reducing inheritance taxes

If you expect to receive or leave behind significant assets, it may be worth exploring:

• Lifetime gifting: Reduce estate size through gifts below the annual exclusion limit.
• Charitable donations: Leave a portion to nonprofit organizations.
• Trust tax preparation: Work with a trust tax preparer to create an irrevocable trust that shelters assets.
• Life insurance planning: Policies can help heirs cover tax bills without selling off assets.

Who is required to file inheritance tax returns?

Generally, it’s the beneficiaries who are responsible for filing and paying inheritance tax. However, in some states, the executor or trustee may handle the filing on behalf of the heirs. Deadlines and forms vary by state, so early planning is essential.

What are some of the difficulties estate tax preparers face when planning to minimize inheritance taxes?

Professionals in estate tax preparation face challenges such as:

• Rapidly changing tax laws
• Fluctuating asset values, particularly real estate and investments
• Navigating family dynamics or complex ownership structures
• Ensuring compliance across multiple jurisdictions

This is why working with a knowledgeable trust tax preparer can make all the difference.

What happens if I don’t pay my inheritance taxes?

Failure to pay can lead to:

• IRS or state liens on property
• Penalties and interest on unpaid taxes
• Legal action or loss of inherited assets

Even if you inherited property but didn’t liquidate it, taxes may still be due. Avoiding this mistake starts with early awareness and sound guidance.

The Bottom Line

Only a few states levy inheritance taxes, and most heirs won’t pay anything, but when taxes are due, they can be significant. With thresholds, exemptions, and rules differing by state and relationship, it’s critical to work with a team that understands the terrain.

NTC Accounting Firm is more than just an estate tax preparer. We support clients nationwide with everything from trust tax preparation to full financial planning for inherited wealth. Whether you’re a healthcare professional inheriting your family home, or a business owner creating a trust for your children, we help you:

• Understand your liability
• Strategically reduce tax exposure
• Navigate compliance and paperwork with confidence

Our team has already helped clients across healthcare, real estate, and entertainment protect their legacy and reduce stress.

Don’t wait until a tax notice arrives. Click here to schedule your no-pressure consultation with one of our expert preparers today.