When Do You Have to Pay Inheritance Tax: Triggers and Exemptions

You have to pay inheritance tax only when three things line up at once: the person who died lived in (or owned property in) Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania; your relationship to them falls outside that state’s exempt class; and your share exceeds the exemption threshold for your class. If any one of those is missing, you owe nothing. The federal government does not impose an inheritance tax, and 45 states don’t either.¹

Where you live doesn’t matter. The tax follows the deceased person’s state of residence or the location of the property. If your aunt lived in New Jersey and left you money, New Jersey’s rules apply to your share no matter where you are.²

The Three Conditions That Trigger the Tax

First, the state connection. One of the five states above must be in the picture, through the deceased’s residence or through real estate or other property physically located there.

Second, your relationship. Every one of these states groups beneficiaries into classes and treats close family very differently from distant relatives and strangers. Some relationships are exempt entirely.

Third, the dollar threshold. The exemption amount isn’t a single figure per state; it changes with your class. In Nebraska, close relatives can inherit up to $100,000 tax-free, more distant relatives have a $40,000 threshold, and unrelated individuals get only $25,000. Maryland skips inheritance tax entirely if the estate’s total value is under $50,000.¹

How Your Relationship Changes What You Owe

Spouses and Direct Descendants

Surviving spouses pay zero in all five states. Children, grandchildren, and parents are also fully exempt in most of them. New Jersey, for example, exempts spouses, parents, children, and grandchildren regardless of the amount. Pennsylvania is the outlier: direct descendants pay 4.5% on everything they receive, with no exemption amount.²

Siblings and Extended Family

Treatment varies sharply. Kentucky exempts siblings entirely, putting them in the same class as children and spouses. Pennsylvania taxes them at 12%. New Jersey applies rates up to 16% for brothers, sisters, nieces, and nephews.² Maryland exempts siblings but taxes nieces, nephews, aunts, uncles, and cousins at a flat 10%.

Unrelated Beneficiaries

Friends, unmarried partners in most states, and anyone with no family connection face the highest rates, running from 10% in Maryland up to 15% or 16% in the other four states.¹ If you inherit from someone you’re not related to, expect the heaviest bite.

Other Exemptions

A few categories of inheritances are broadly sheltered regardless of who the beneficiary is:

Property left to organizations that qualify under Section 501(c)(3) of the Internal Revenue Code is exempt across all five states.
Transfers to federal, state, or local government bodies are not taxed.
Most states exempt life insurance proceeds paid directly to a named beneficiary. If the proceeds are payable to the estate instead, they lose this protection.

Who Actually Pays the Bill

Inheritance tax is the beneficiary’s responsibility. Inherit $200,000 at a 12% rate and you owe $24,000 out of what you received. The estate’s executor handles the paperwork and identifies which shares are taxable, but the tax itself comes out of your inheritance.

There is one common workaround. A will can include a tax apportionment clause directing the estate to pay some or all inheritance taxes before distributing assets. When that happens, the estate absorbs the bill and beneficiaries receive their shares net of tax. It’s a planning choice, not a default. If the will is silent, each beneficiary pays their own.

When You Have to File and Pay

Each state sets its own deadline running from the date of death:

New Jersey: 8 months³
Pennsylvania: 9 months
Nebraska: 12 months
Kentucky: 18 months
Maryland: varies based on the type of filing

Missing the deadline is expensive. New Jersey charges 10% annual interest on unpaid tax from the moment the eight-month window closes, and extensions apply only to the return, not to the payment. Other states impose similar interest and penalties. Pennsylvania runs a small incentive the other way: a 5% discount on tax paid within three months of the date of death.

How Inherited Assets Are Valued

Inherited property is valued at its fair market value on the date the person died.⁴ That applies to everything: real estate, bank accounts, investment portfolios, vehicles, and personal property. Real estate and business interests typically require a professional appraisal. Publicly traded stocks are simpler because market prices on the date of death are readily available.

What Inheritance Tax Is Not

People mix up inheritance tax and federal estate tax constantly. Estate tax is paid by the deceased’s estate before anything is distributed; inheritance tax is paid by each beneficiary out of what they receive.² Maryland is the only state that imposes both, so a large Maryland estate can be hit twice: the estate pays estate tax on its total value, and then certain beneficiaries pay inheritance tax on what they receive.

Inheritance tax is also separate from the income tax you may owe on an inherited retirement account. Most non-spouse beneficiaries have to empty an inherited traditional IRA within 10 years of the original owner’s death, and every dollar withdrawn is taxed as ordinary income. If the original owner had already started required minimum distributions, the beneficiary has to continue taking them annually during that 10-year window. Inherited Roth IRAs also have to be emptied within 10 years for most non-spouse beneficiaries, but withdrawals are tax-free as long as the account was open for at least five years. Missing a required distribution triggers a 25% penalty on the amount that should have been withdrawn, dropping to 10% if corrected within two years.⁴ These obligations apply whether or not the deceased lived in an inheritance tax state.

1
Tax Foundation. Estate and Inheritance Taxes by State, 2025
2
Tax Policy Center. How Do State and Local Estate and Inheritance Taxes Work
3
Cornell Law Institute. N.J. Admin. Code 18:26-9.1 – Date Return Due
4
Internal Revenue Service. Gifts and Inheritances