Estate taxes and inheritance taxes can add to the sting of losing a loved one, but not everyone has to pay them. The difference between estate tax and inheritance tax is significant, and understanding how each one works may help you to plan ahead.
After learning the basics, consider discussing the details with a financial or legal representative and your family.
Estate Tax vs. Inheritance Tax
These terms may sound like they refer to the same thing, but there are important distinctions between these taxes. The primary differences are who pays the tax and who receives the funds.
A deceased person's estate pays estate taxes, and the recipient might be the federal or state government. Beneficiaries pay inheritance taxes to state governments, although not all states have inheritance taxes.
What Are Estate Taxes?
An estate tax is a tax based on the net value of a deceased person’s assets at the time of death. This may include:
- Money
- Property, such as real estate
- Collectibles
- Financial accounts
- Other assets
Debts, such as a mortgage loan, can reduce the value of an estate. Other adjustments may also apply depending on the situation.
The estate is responsible for paying any estate taxes before assets are distributed to beneficiaries.
Federal estate tax rates start at 18% and can go up to 40%.1 State estate taxes vary by location. Many families do not need to pay estate tax. Here's some more information on how federal and state estate taxes work.
Federal Estate Tax
The IRS sets a threshold for taxable estates. Only estates above this amount are required to file a federal estate tax return. For 2026, if the decedent is a U.S. citizen or resident, a return is generally required only if the estate is worth more than $15 million.2 If the estate is below this threshold, federal estate taxes are not owed. However, an inheritance tax may still apply in some cases.
State Estate Tax
Twelve states and the District of Columbia have estate taxes. These include Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Each state has its own exemption amount, which can range from $1 million to $13.92 million.3
These guidelines apply to many situations, but tax rules can vary. It can help to speak with a tax or legal professional about your specific situation.
What Are Inheritance Taxes?
An inheritance tax is a tax you pay on assets received from a deceased person's estate. Only five states currently impose inheritance taxes:
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
An inheritance tax is the responsibility of those who receive assets after somebody dies, not the estate. The amount each person pays may vary depending on how much they receive.
If you receive an inheritance, check with your state to learn about any requirements for paying inheritance taxes. Even in states with inheritance taxes, you might be able to receive assets without paying any tax.
Example of Estate Tax vs. Inheritance Tax
This fictional example may help you better understand how estate and inheritance taxes work.
Say Pat dies with $1 million in assets and owes $200,000 on a real estate loan. As a result, her net estate is $800,000. You can subtract debts from the gross estate, but a tax or legal professional can help explain your situation. All assets pass to Pat's lifelong friend, Jane.
Estate Tax
$800,000 is well below the IRS threshold of $15 million, so no federal estate tax is due in this case. Pat's state exemption amount is $3.5 million, so her assets do not exceed that level.
Inheritance Tax
Pat lives in a state with an inheritance tax. The state charges 10% on transfers to individuals who are not relatives of the deceased person or who are not exempt from paying taxes. As a result, Jane must pay $80,000. If Jane were Pat's daughter, the assets might pass without any inheritance tax, depending on state law.
Different Taxes for Different Situations
These tax types may both arise after somebody dies with assets. There is a big difference between estate tax and inheritance tax, and you might not have to pay taxes in some cases. Estate planning can help you predict what an estate owes, and can help beneficiaries plan for their futures. Reviewing your situation with a financial or legal professional can help you make informed decisions about your estate plan.
Sources
- Instructions for Form 706 (09/2025). https://www.irs.gov/instructions/i706.
- Frequently Asked Questions on Estate Taxes. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes.
- Estate and Inheritance Taxes by State, 2025. https://taxfoundation.org/data/all/state/estate-inheritance-taxes/.
