Inheritance Tax vs Estate Tax: Key Differences Explained

People often use “inheritance tax” and “estate tax” interchangeably, but they are different taxes paid by different people. Understanding the distinction matters for planning, especially if you live in a state that imposes one or both.

Key Takeaways

• Estate tax is paid by the estate; inheritance tax is paid by the heirs.
• The federal government only has an estate tax -- there is no federal inheritance tax.
• Six states impose inheritance taxes, and rates depend on your relationship to the deceased.
• Spouses are almost always exempt from both taxes.

Estate Tax: Paid by the Estate

The estate tax is levied on the total value of a deceased person’s estate before assets are distributed to heirs. Think of it as a tax on the right to transfer wealth at death.

Federal Estate Tax

The federal estate tax applies only to large estates:

Fewer than 0.1% of estates owe federal estate tax. The executor files Form 706 and pays any tax due before distributing assets to heirs. For a deeper look, see our estate tax basics guide.

State Estate Taxes

Twelve states and Washington D.C. impose their own estate taxes, often with much lower exemptions than the federal level:

State	2025 Exemption	Top Rate
Oregon	$1 million	16%
Massachusetts	$2 million	16%
Rhode Island	$1.77 million	16%
Minnesota	$3 million	16%
New York	$6.94 million	16%
Illinois	$4 million	16%
Maine	$6.8 million	12%
Vermont	$5 million	16%
Maryland	$5 million	16%
Connecticut	Matches federal	12%
Hawaii	$5.49 million	20%
Washington	$2.19 million	20%
District of Columbia	$4.53 million	16%

New York has a “cliff”: If your estate exceeds the exemption by more than 5%, the entire estate is taxable, not just the excess.

Inheritance Tax: Paid by the Heirs

An inheritance tax is levied on each individual heir based on what they receive and their relationship to the deceased. Closer relatives typically pay lower rates or are exempt entirely.

States with Inheritance Tax

Six states impose an inheritance tax:

State	Spouse Rate	Children Rate	Siblings Rate	Other Heirs Rate
Iowa	Exempt	Exempt	2-6%	2-6%
Kentucky	Exempt	Exempt	4-16%	6-16%
Maryland	Exempt	Exempt	10%	10%
Nebraska	Exempt	1% (over $100K)	11% (over $40K)	15% (over $25K)
New Jersey	Exempt	Exempt	11-16%	15-16%
Pennsylvania	Exempt	4.5%	12%	15%

Key patterns:

• Spouses are always exempt in every state
• Children (lineal descendants) are exempt in most states, with Pennsylvania and Nebraska as exceptions
• More distant relatives and unrelated heirs pay the highest rates
• Charitable bequests are typically exempt

Maryland: The Double-Tax State

Maryland is the only state that imposes both an estate tax and an inheritance tax. However, any inheritance tax paid is credited against the estate tax, so assets aren’t fully double-taxed.

Side-by-Side Comparison

Feature	Estate Tax	Inheritance Tax
Who pays	The estate (before distribution)	Each individual heir
Federal version	Yes ($13.99M exemption in 2025)	No
State versions	12 states + D.C.	6 states
Rate basis	Total estate value	Amount each heir receives
Relationship matters	No	Yes — closer relatives pay less
Spouse exempt	Unlimited marital deduction	Exempt in all states
Filed on	Form 706 (federal) or state form	State-specific heir forms

The Stepped-Up Basis: A Hidden Tax Benefit for Heirs

Regardless of estate or inheritance tax, inherited assets receive a stepped-up cost basis to the fair market value at the date of death. This eliminates capital gains tax on all appreciation during the deceased’s lifetime.

Example:

• Parent purchased stock for $50,000
• Stock is worth $400,000 at death
• Heir’s new cost basis: $400,000
• $350,000 of gains are never taxed

This applies to stocks, real estate, and most other assets. The major exception: inherited retirement accounts (IRAs, 401(k)s) do not get a stepped-up basis — distributions are taxable income to the heir. For a full breakdown of how the step-up works, see our step-up in basis guide.

How to Minimize Estate and Inheritance Taxes

Strategies That Reduce Both

1. Annual gift exclusion — Give up to $19,000 per recipient per year (2025) without using any lifetime exemption. Married couples can give $38,000 together. See our gift tax limits guide for full details.
2. Charitable giving — Bequests to qualified charities are exempt from both estate and inheritance taxes. Charitable remainder trusts (CRUTs) can provide income while reducing the taxable estate.
3. Irrevocable trusts — Assets transferred to irrevocable trusts are removed from your taxable estate. QPRTs, GRATs, and IDGTs are common tools. For a primer on how trusts are taxed, see our trust taxation guide.
4. Life insurance in an ILIT — An irrevocable life insurance trust keeps the death benefit out of your estate while providing liquidity for heirs to pay any taxes due.

Inheritance Tax-Specific Strategies

Since inheritance tax rates depend on the heir’s relationship:

• Leave more to exempt classes (spouse, children in most states) and less to taxable classes
• Use trusts — In some states, assets distributed through a trust may be treated differently than outright bequests
• Consider domicile — If you split time between states, establishing domicile in a state without inheritance tax can eliminate the liability

The 2026 Exemption Change

The current high federal estate tax exemption expires after 2025 under the TCJA sunset provisions. If Congress does not act:

• The exemption drops from ~$14 million to ~$7 million per person
• Many more estates become potentially taxable
• Planning done now (while the exemption is high) can lock in the larger exemption through gifts or trust transfers

This makes 2025 and early 2026 a critical window for estate planning.

Do You Need to Worry About These Taxes?

Quick Assessment

For most Americans, the answer is no:

• Is your total estate (all assets) above $7 million? If not, federal estate tax is unlikely even after 2026
• Do you live in a state with an estate tax? Check the state tables above
• Do you live in one of the six states with inheritance tax?
• Are your intended heirs distant relatives or unrelated? They face higher inheritance tax rates

If none of these apply, your inheritance will likely pass tax-free at both the federal and state level. Focus instead on income tax planning for inherited retirement accounts — the 10-year distribution rule and taxes on retirement withdrawals matter more for most families than estate tax.

For comprehensive strategies, see our estate tax planning strategies guide.

How sharper.tax Helps

When you upload your tax return to sharper.tax, our platform analyzes your income, investment gains, and overall tax profile to help identify whether estate or inheritance tax planning should be on your radar. We surface the numbers that matter — total income, capital gains, retirement balances, and marginal tax rates — and connect them to strategies that can reduce your lifetime tax burden. For more on estate planning, see our estate tax basics guide and grantor trust guide. Sophisticated tax planning used to require a high-end CPA — we make it available for free.

Sources

• IRS Estate and Gift Taxes
• IRS Form 706 Instructions
• IRS Publication 559 (Survivors, Executors, and Administrators)
• Tax Foundation: State Estate and Inheritance Taxes

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The information above is educational and not tax advice.