Inheritance Tax vs Estate Tax: Key Differences

"Death tax" gets used for two different taxes, and mixing them up leads to bad planning. One is charged to the estate before anything is distributed; the other is charged to each heir based on what they receive and how they were related to the person who died.

Estate tax is levied on the total value of a deceased person's estate and is paid by the executor before heirs get anything. Inheritance tax is levied on each beneficiary's share and depends on their relationship to the deceased. The federal government has only an estate tax, which in 2026 applies above $15 million. Inheritance tax exists in just five states: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland is the only state with both.

Estate tax vs. inheritance tax at a glance

How the federal estate tax works

The IRS taxes a decedent's taxable estate, plus lifetime taxable gifts, above the basic exclusion amount, which is $15,000,000 for 2026. The excess is taxed at 40%.

Example: an unmarried person dies in 2026 with an $18,000,000 taxable estate and no lifetime taxable gifts. Federal estate tax: ($18,000,000 − $15,000,000) × 40% = $1,200,000. The executor pays it from estate assets, and the heirs split what's left.

Married couples can shield up to $30 million. Property left to a U.S.-citizen spouse passes tax-free, and portability lets the surviving spouse add the first spouse's unused exclusion, but only if the executor files Form 706 on time, even when no tax is due.

You can run the full federal and state calculation with the estate tax calculator.

Where state estate taxes apply

Twelve states and DC levy an estate tax, usually at much lower thresholds than the federal one: Connecticut ($15,000,000 in 2026), Hawaii, Illinois ($4,000,000), Maine ($7,160,000), Maryland ($5,000,000), Massachusetts ($2,000,000), Minnesota ($3,000,000), New York ($7,350,000), Oregon ($1,000,000), Rhode Island ($1,838,056), Vermont ($5,000,000), Washington ($3,000,000 for deaths on or after July 1, 2026), and DC. Top rates run from 12% to 20%, with Washington charging up to 35% for deaths between July 1, 2025 and June 30, 2026.

The estate tax calculator page has the full 2026 table with sources. Two traits stand out:

• New York's cliff. If the New York taxable estate exceeds 105% of the $7,350,000 exclusion ($7,717,500), the exclusion disappears and the whole estate is taxed.
• No portability in most states. A couple in Illinois or Massachusetts who leaves everything to the survivor can waste the first spouse's state exemption. Credit shelter (bypass) trusts are the usual fix. See Illinois and Massachusetts estate tax planning.

The five states with an inheritance tax in 2026

Iowa used to be a sixth, but it repealed its inheritance tax for deaths on or after January 1, 2025 (Iowa Code §450.98).

Nebraska's rates and exemptions were raised for deaths on or after January 1, 2023, and the tax is administered by the county. New Jersey's rate tables are published by the NJ Division of Taxation. Charities are exempt in all five states.

Worked examples: the same bequest in five states

A $300,000 bequest to a niece

A $200,000 bequest to a brother

• Pennsylvania: $200,000 × 12% = $24,000
• New Jersey (Class C): ($200,000 − $25,000) × 11% = $19,250
• Nebraska (close relative): ($200,000 − $100,000) × 1% = $1,000
• Maryland and Kentucky: siblings are exempt, so $0

These examples show why inheritance tax matters most for bequests to siblings, nieces, nephews, unmarried partners, and friends. Leaving the same amount to a spouse or child usually costs little or nothing.

Which state's tax applies?

State death taxes follow the decedent, not the heir. A Florida resident who inherits from an aunt who lived in Pennsylvania owes Pennsylvania inheritance tax on the bequest. Real estate is the exception that cuts the other way: land and buildings are taxed by the state where they're located, so a Pennsylvania cabin owned by a New York resident can still trigger Pennsylvania inheritance tax.

Due dates and who actually writes the check

• Pennsylvania: due at death, delinquent after nine months, with a 5% discount for paying within three months.
• New Jersey: the return and payment are due eight months after death; the executor usually files and pays from the estate.
• Kentucky, Maryland, and Nebraska: deadlines and filing offices differ (Nebraska's tax is handled by the county court), so the executor should confirm them early.
• Federal Form 706: due nine months after death, extendable six months for filing.

Even though the heir is legally liable, the executor typically withholds the tax from that heir's share. A will can instead direct the estate to pay all inheritance taxes from the residue, which shifts the cost onto whoever inherits the remainder. That's worth deciding on purpose.

Income tax is a separate question

Neither tax is income tax. Inherited cash, stocks, and real estate are generally not taxable income to the heir. Two income tax rules still matter:

Step-up in basis. Most inherited assets get a cost basis equal to their value at death. If your father bought stock for $10,000 and it's worth $500,000 when he dies, your basis is $500,000. Sell right away and you report no gain, instead of the $490,000 gain he would have had. Assets given during life keep the giver's basis instead; how the gift tax works explains the difference.

Inherited retirement accounts. Traditional IRAs and 401(k)s get no step-up. Each withdrawal is ordinary income to the heir, and most non-spouse beneficiaries must empty the account within 10 years. A large inherited IRA can push an heir into a higher bracket; spreading withdrawals across the 10 years helps. Estimate the tax with the IRA withdrawal tax calculator.

Planning around both taxes

• Name beneficiaries with the tax in mind. In inheritance tax states, leaving retirement accounts or life insurance to exempt heirs and other assets to taxed heirs can change the total due. Pennsylvania and New Jersey, for example, don't tax life insurance paid to a named beneficiary.
• Use the annual gift exclusion. Gifts of up to $19,000 per recipient in 2026 reduce the estate. Watch state look-back rules: Pennsylvania taxes gifts over $3,000 per recipient made within one year of death, so last-minute gifts there may not save anything.
• Pay tuition and medical bills directly; they're outside the gift tax entirely.
• Leave assets to charity through the will or a charitable remainder trust to reduce both taxes.
• Fund credit shelter trusts in states without portability so both spouses' state exemptions are used.
• Consider a disclaimer after death. An heir who refuses a bequest with a qualified disclaimer, generally within nine months of death and before accepting any benefit, is treated as if they had died first. The property then passes to the next beneficiary under the will, which can move it to an exempt heir, such as a child instead of a sibling.
• Revisit domicile. Moving from New Jersey to Delaware, or from Maryland to Virginia, can remove both taxes, but only if the move is real and documented.

For the higher-end strategies, from GRATs to life insurance trusts, read estate tax planning strategies.