Inheritance Tax vs. Estate Tax – The 17 States That Still Charge You
What’s the Difference Between Inheritance Tax and Estate Tax?
Many people use the terms “inheritance tax” and “estate tax” interchangeably, but they are actually two very different things. Understanding the difference can save you a lot of confusion — and potentially a lot of money.
An estate tax is charged on the total value of a deceased person’s estate before it gets distributed to the heirs. Think of it as a tax on the right to pass wealth along. The estate itself pays the bill, not the people receiving the assets.
An inheritance tax, on the other hand, is paid by the person who receives the assets. If you inherit money or property from a relative or friend, you may owe the government a percentage of what you received, depending on where you live and your relationship to the deceased.
Some states only have one of these taxes. Some have both. And most states have neither. Knowing which category your state falls into is a critical part of smart tax planning, especially if you are expecting an inheritance or planning your own estate.
Does the Federal Government Charge These Taxes?
Yes, but only the estate tax applies at the federal level. The federal government does not impose an inheritance tax. The federal estate tax only kicks in for estates valued above a certain threshold. As of recent tax law, that threshold is over $12 million per individual, which means the vast majority of Americans will never owe federal estate tax.
However, that threshold is set to drop significantly after 2025 when current tax provisions are scheduled to expire. This makes estate tax law a hot topic for anyone with substantial assets and a reason why working with a financial planner or tax attorney is becoming more important than ever.
The 17 States That Still Charge You
While most states have moved away from these taxes, 17 states and Washington D.C. still have either an estate tax, an inheritance tax, or both. Here is a breakdown of where things stand.
States with an Estate Tax
The following states have their own estate tax, separate from the federal one. Each state has its own exemption threshold, and in many cases, that threshold is much lower than the federal limit — meaning more estates end up getting taxed at the state level.
- Connecticut – Exemption threshold around $12.92 million
- Hawaii – Exemption threshold at $5.49 million
- Illinois – Exemption threshold at $4 million
- Maine – Exemption threshold at $6.41 million
- Maryland – Exemption threshold at $5 million (also has inheritance tax)
- Massachusetts – Exemption threshold at $1 million
- Minnesota – Exemption threshold at $3 million
- New York – Exemption threshold at $6.58 million
- Oregon – Exemption threshold at $1 million
- Rhode Island – Exemption threshold at $1.73 million
- Vermont – Exemption threshold at $5 million
- Washington State – Exemption threshold at $2.193 million
- Washington D.C. – Exemption threshold at $4 million
Massachusetts and Oregon stand out because their exemption thresholds are only $1 million. That may sound like a lot, but when you factor in real estate, retirement accounts, and life insurance, many middle-class families can find themselves over that line without even realizing it.
States with an Inheritance Tax
The following states charge an inheritance tax, meaning the person receiving the assets may owe taxes depending on the value inherited and their relationship to the deceased. Spouses are almost always exempt. Children and direct descendants are usually exempt or taxed at very low rates. The tax tends to hit harder on distant relatives and unrelated individuals.
- Iowa – Currently being phased out, but still applies to some estates
- Kentucky – Tax ranges from 4% to 16% depending on the relationship and amount
- Maryland – Both estate and inheritance tax apply here
- Nebraska – Tax ranges from 1% to 15% depending on relationship
- New Jersey – No estate tax, but inheritance tax still applies
- Pennsylvania – Tax ranges from 4.5% to 15% depending on the relationship
Why Your Relationship to the Deceased Matters So Much
For inheritance tax purposes, the closer you are to the person who passed away, the less you are likely to owe. Most states structure their inheritance tax rates based on the beneficiary’s relationship to the deceased. Here is a general idea of how it typically works:
- Spouses – Almost always completely exempt
- Children and grandchildren – Usually exempt or taxed at very low rates
- Siblings – Often taxed at moderate rates
- Nieces, nephews, and cousins – Usually taxed at higher rates
- Friends and unrelated individuals – Typically face the highest tax rates
This is one reason why proper estate planning matters so much. If you are leaving assets to someone outside your immediate family, they could end up losing a significant portion of what you leave them to state taxes.
Real-World Example: What This Looks Like in Practice
Let’s say you live in Pennsylvania and your aunt leaves you $200,000. Since you are a niece or nephew, Pennsylvania charges a 15% inheritance tax on that amount. That means you would owe $30,000 in state taxes right off the top, leaving you with $170,000 instead of $200,000.
Now let’s say you live in Florida, which has no inheritance tax or estate tax at the state level. The same inheritance would come to you completely free of state taxation. The only potential federal concern would apply if the estate were worth tens of millions of dollars.
This difference shows why where you live — and where the person leaving you assets lives — can have a massive impact on how much you actually receive.
Common Misconceptions About These Taxes
There are several myths and misunderstandings that circulate about estate and inheritance taxes. Here are a few worth clearing up:
- Myth: Everyone pays estate tax. In reality, only a small percentage of estates are large enough to trigger federal estate tax, and even state-level taxes often have meaningful exemption thresholds.
- Myth: Inheritance tax and estate tax are the same thing. They are not. One is paid by the estate, the other by the individual who receives the inheritance.
- Myth: Life insurance is always tax-free. Life insurance death benefits generally avoid income tax, but they can still count toward the taxable estate for estate tax purposes depending on how the policy is structured.
- Myth: Giving assets away before death avoids all taxes. Gift tax laws exist to prevent this strategy from being exploited, and large gifts can still be factored into the taxable estate under certain conditions.
How to Plan Around These Taxes
The good news is that there are legal and widely used strategies to reduce or even eliminate estate and inheritance tax exposure. Here are some common approaches that financial planners and estate attorneys often recommend:
- Trusts: Setting up the right kind of trust can remove assets from your taxable estate while still benefiting your heirs.
- Annual gifting: You can give a certain amount per year to individuals without triggering gift tax. Over time, this can significantly reduce the size of your taxable estate.
- Charitable giving: Donating to qualified charities can reduce your taxable estate and provide a meaningful legacy at the same time.
- Life insurance trusts: A properly structured irrevocable life insurance trust can keep life insurance proceeds out of your taxable estate.
- Relocation: Some people choose to move to a state with no estate or inheritance tax as part of their overall tax planning strategy. This is especially common among retirees.
State Taxation Trends: Are These Taxes Going Away?
The trend over the past two decades has been clear — states have been eliminating or scaling back these taxes. Many states that once had estate taxes have repealed them entirely, often to remain competitive and attract wealthy residents. Iowa is in the process of phasing out its inheritance tax entirely.
That said, some states have shown no signs of budging. Oregon and Massachusetts, with their low $1 million exemption thresholds, continue to affect a broader range of families than most people expect. State budget pressures can make it politically difficult to eliminate revenue sources, even unpopular ones.
Changes in federal estate tax law after 2025 may also push some states to revisit their own rules. It is worth keeping an eye on developments in your state if you are doing long-term estate planning.
What You Should Do Right Now
Whether you are planning your own estate or expecting to receive an inheritance, a few straightforward steps can make a real difference:
- Find out which state’s laws apply. Estate and inheritance taxes are generally based on where the deceased person lived, not where the beneficiary lives — though some states have rules about real estate located within their borders.
- Review your current estate plan. If you have a will, trust, or beneficiary designations that haven’t been looked at in a few years, now is a good time to revisit them.
- Talk to a qualified professional. A tax attorney or estate planning professional can help you understand exactly what applies to your situation and identify strategies that could reduce your tax burden legally.
- Stay informed about changes in the law. Estate tax law has changed multiple times in recent years and more changes are expected. Staying current gives you the chance to act before a change affects you.
The Bottom Line
Estate taxes and inheritance taxes are not the same thing, and they do not apply in every state. But for the millions of Americans who live in or inherit from the 17 states and D.C. that still have these taxes, the financial impact can be very real. Understanding the rules, knowing your relationship-based exemptions, and working with knowledgeable professionals can go a long way toward protecting the wealth you have built or the inheritance you are set to receive.
Good tax planning is not about avoiding your responsibilities — it is about making informed decisions that reflect both the law and your personal goals. The more you understand about how state taxation works in this area, the better positioned you will be to make those decisions wisely.
