The short answer, then the decision
Whether a death creates a state tax bill depends on two different taxes that people constantly merge. An inheritance tax is charged to the person who receives the money, at rates based on how closely related they were to the deceased. An estate tax is charged to the estate itself before anything is distributed, based on total estate size. Maryland, uniquely, has both.
The 2026 map is small and shrinking. Five states levy inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa completed its repeal for deaths on or after January 1, 2025. Twelve states plus DC levy estate taxes, with exemptions ranging from $1,000,000 in Oregon to Connecticut’s $15,000,000, matched to the 2026 federal exemption. The federal government, for its part, taxes only estates above $15,000,000 per person in 2026, and never taxes inheritances as income.
Location rules matter as much as rates: inheritance tax generally follows where the deceased lived (plus real estate located in a taxing state), not where the heir lives. A Florida heir inheriting from a Pennsylvania parent pays Pennsylvania inheritance tax; a Pennsylvania heir inheriting from a Florida parent pays none.
In every inheritance tax state, surviving spouses pay zero, and lineal heirs pay far less than distant relatives or friends. The expensive combinations are collateral and unrelated heirs, up to 15% in Nebraska and Pennsylvania, 16% in Kentucky and New Jersey. Since the tax follows the decedent’s state, planning happens on the estate side, and beneficiary designations decide real dollars.
Estate tax vs. inheritance tax vs. income tax
Three different questions asked about the same dollars.
Estate tax asks: how large was the estate? It is levied on the estate before distribution, above an exemption. The federal estate tax works this way, with a $15,000,000 per-person exemption and a 40% top rate for 2026 under OBBBA and Rev. Proc. 2025-32, as do the 12 state estate taxes and DC’s.
Inheritance tax asks: who received it? It is levied on each beneficiary’s share, at a rate set by relationship class, usually with per-class exemptions. Only the five states below ask this question, and the estate’s size is largely irrelevant.
Income tax asks: is this income? For inherited money, the federal answer is no: inheritances are excluded from the heir’s gross income under IRC 102. The two big caveats are inherited retirement accounts, whose distributions are taxable income, and income the inherited assets earn after death, which is ordinary taxable income like any other.
The five inheritance tax states in 2026
Rates and exemptions by beneficiary class.
Each state groups heirs into classes by relationship. Spouses are exempt everywhere, and charities are exempt or effectively exempt in each. The rates below apply to deaths in 2026; Iowa is gone from the list, having repealed its tax for deaths on or after January 1, 2025.
| State | Who pays what | Exemptions |
|---|---|---|
| Kentucky | Class A (spouse, parents, children, siblings): exempt. Class B (nieces/nephews, aunts/uncles, great-grandchildren): 4% to 16%. Class C (all others): 6% to 16%. | Class B: $1,000; Class C: $500 |
| Maryland | 10% flat on non-exempt heirs. Spouse, children, parents, siblings, and lineal descendants exempt. Maryland also levies a separate estate tax. | Exempt classes as listed |
| Nebraska | Class 1 (immediate relatives): 1%. Class 2 (remote relatives): 11%. Class 3 (others): 15%. Beneficiaries under 22 exempt (deaths on or after 1/1/2023, LB 310). | $100,000 / $40,000 / $25,000 by class |
| New Jersey | Class A (spouse, descendants, parents): exempt. Class C (siblings, sons/daughters-in-law): 11% to 16% above $25,000. Class D (others): 15% to 16%. Class E (charities): exempt. | Class C: $25,000 |
| Pennsylvania | Spouse and parent-to-child under 21: 0%. Lineal heirs: 4.5%. Siblings: 12%. Others: 15%. Charities exempt. | Family farm and business exemptions available |
Rates per each state’s revenue department for deaths in 2026. Nebraska legislation to cut the 15% class was proposed but had not passed as of August 2026. Inheritance tax generally applies based on the decedent’s residence, plus real property located in the state.
Worked example
One $400,000 bequest, three different Pennsylvania heirs
- To a surviving spouse (0%)
- $0 tax
- To an adult child (lineal, 4.5%)
- $18,000 tax
- To a sibling (12%)
- $48,000 tax
- To a friend or niece by marriage (15%)
- $60,000 tax
Illustrative: Pennsylvania rates applied to a $400,000 taxable bequest for a death in 2026. Identical dollars, a $60,000 swing purely on relationship. Results vary.
The 12 estate tax states and DC
2026 exemptions, and the New York cliff.
Estate taxes bite far above where inheritance taxes do, but exemptions vary enormously. For deaths in 2026: Oregon exempts only $1,000,000 (rates 10% to 16%), Massachusetts $2,000,000, Minnesota $3,000,000, Washington $3,076,000 for deaths in the first half of 2026 and $3,000,000 on or after July 1, Illinois $4,000,000, Maryland and Vermont $5,000,000, Hawaii $5,490,000, New York $7,350,000, and Connecticut matches the federal $15,000,000 with a flat 12% rate. Maine, Rhode Island, and DC index their exemptions annually; confirm current-year values with each revenue department.
New York deserves its own warning: it is a cliff, not a credit. Estates up to 105% of the exemption, $7,717,500 for 2026, get the benefit; go over the cliff and the entire estate is taxed from dollar one, at rates up to 16%. Near the line, deathbed charitable gifts routinely save more tax than they cost.
Illinois pairs its $4,000,000 exemption with no portability: a married couple that leaves everything to the survivor outright can waste the first spouse’s exemption entirely. Credit-shelter trust planning, standard practice for Illinois couples above the threshold, preserves both. Washington’s rates for deaths on or after July 1, 2025 run from 10% up to 35%, the nation’s highest top estate rate; a reported rollback of the top rate for deaths on or after July 1, 2026 should be verified against the current Department of Revenue tables before relying on it.
State exemptions are a fraction of the federal one
A $6 million estate owes zero federal estate tax in 2026 but faces state estate tax in Oregon, Massachusetts, Minnesota, Washington, Illinois, Maryland, Vermont, and Hawaii if the decedent lived there. Residency at death, and real estate located in taxing states, drive the bill. This is a planning problem while you are alive, not a filing problem after.
What heirs actually owe: basis step-up and the 10-year rule
The income tax rules that matter more than either death tax.
For most families, the important rules are federal income tax rules. Inherited property receives a basis step-up to date-of-death fair market value under IRC 1014: the stock your mother bought for $50,000 and left you at a $500,000 value carries a $500,000 basis, and the $450,000 of lifetime appreciation is never income-taxed. Sell the next day and the taxable gain is roughly zero. This is why holding appreciated assets until death often beats gifting them during life, where carryover basis applies.
Inherited retirement accounts are the exception on both counts: no step-up, and distributions are taxable income to the beneficiary as received. Under the SECURE Act’s 10-year rule, most non-spouse beneficiaries must empty an inherited IRA or 401(k) by the end of the tenth year after death, and beneficiaries of owners who had begun required distributions generally must also take annual distributions along the way. Ten years of a large IRA stacked on a beneficiary’s peak earnings can push distributions into top brackets; spreading withdrawals deliberately across the window is the core planning move.
Timing rounds out the picture: appreciation between the date of death and a later sale is taxable capital gain measured from the stepped-up basis, and estates or heirs should record date-of-death values carefully, especially for real estate and closely held business interests.
Taxstra Tip
If you inherit both a taxable brokerage account and a traditional IRA, spend from them in the right order: the brokerage assets arrived with a stepped-up basis and sell nearly tax-free, while every IRA dollar comes out as ordinary income. Map the 10-year IRA drawdown against your expected income years before taking anything beyond required amounts.
What to check before you act
A practical review sequence for the return, books, or planning file.
Determine which state the decedent lived in, and whether they owned real estate in an inheritance or estate tax state.
Identify each beneficiary’s relationship class and the applicable rate before distributions are planned.
Record date-of-death values for every appreciated asset to establish stepped-up basis under IRC 1014.
For inherited retirement accounts, calendar the 10-year deadline and model annual withdrawals against your bracket.
If your own estate may exceed a state exemption, check portability rules; Illinois has none, and New York’s cliff punishes estates just over 105% of the exemption.
Married couples in low-exemption states: review whether trust planning is needed to use both spouses’ exemptions.
Common mistakes
The shortcuts most likely to produce a confident but wrong answer.
Confusing inheritance tax with estate tax
They are levied on different parties under different rules. Checking only the federal $15 million exemption misses state estate taxes that start at $1 million, and inheritance taxes that apply regardless of estate size.
Assuming the heir’s state controls
Inheritance tax follows the decedent’s residence and the location of real property. Moving to Florida does not shield your inheritance from Pennsylvania tax if your parent dies a Pennsylvania resident.
Reporting an inheritance as income
Inheritances are excluded from gross income under IRC 102. Paying income tax on inherited cash or stepped-up property is a pure overpayment; only post-death earnings and retirement account distributions are taxable.
Letting the inherited IRA sit until year ten
Emptying a large inherited IRA in one final-year distribution stacks the whole balance into a single tax year at top rates. The 10-year rule rewards deliberate annual spreading, especially in low-income years.
Selling inherited property using the decedent’s old basis
Heirs sometimes report gain from the original purchase price. Basis stepped up to date-of-death value under IRC 1014; using the old basis overstates gain, sometimes by hundreds of thousands of dollars.
Ignoring the New York cliff and Illinois portability gap
An estate slightly over $7,717,500 in New York loses the entire exclusion, and an Illinois couple without trust planning can waste a $4 million exemption. Both are avoidable with modest lifetime planning.
How Taxstra helps
A useful estimate should lead to a decision
Taxstra connects tax preparation, planning, bookkeeping, payroll, and multi-state filing so the answer reflects your full financial picture. Bring your documents and the decision you are weighing to a free initial consultation.
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