Inheritance Tax Thresholds in the USA

Understanding How Inheritance Taxes Apply by Federal and State Laws in 2025

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Key Highlights

Federal vs. State Taxes: There is no federal inheritance tax in the USA; instead, the federal estate tax applies to estates exceeding $ \text{\$13.99 million} $ per individual in 2025.
State Variability: Only certain states impose an inheritance tax, with thresholds and rates that vary significantly.
Relationship Matters: The tax liability is influenced by the relationship between the deceased and the heir, with close relatives sometimes receiving exemptions or lower rates.

Federal Estate Tax vs. Inheritance Tax

In the United States, the term "inheritance tax" is often confused with the federal estate tax. It is important to distinguish between the two. The federal estate tax is a tax on the estate of the deceased before distribution to heirs. For 2025, the federal estate tax exemption level is set at $ \text{\$13.99 million} $ per individual, or $ \text{\$27.98 million} $ for married couples. This means that if an estate’s total value falls below this threshold, it is generally not subject to federal estate taxes.

Contrastingly, an inheritance tax is levied on the beneficiaries receiving the assets – and this tax is imposed only by a handful of states. Therefore, while no federal inheritance tax exists, your liability for state inheritance tax is determined by the local laws of the state where the decedent lived or where the beneficiary resides.

State Inheritance Tax Conditions and Thresholds

Only a few states in the USA impose an inheritance tax. As of 2025, the states that levy this tax or have related estate taxes include:

States with Inheritance or Estate Taxes

The following states have specific rules regarding the inheritance tax, including minimum thresholds and rates based on the beneficiary’s relationship to the deceased:

Kentucky

In Kentucky, inheritance tax applies to inheritances based on the beneficiary’s relation to the deceased. The tax rate can vary between 4% and 16%, and some amounts as low as a few hundred dollars may be taxable if the inheritance exceeds a minimal exemption. Kentucky commonly exempts closely related heirs to avoid the tax burden or applies lower rates to them.

Nebraska

Nebraska sets its exemption threshold relatively low at around $ \text{\$17,000} $. The tax rate ranges from 1% to 18% depending upon the amount inherited and the eligibility category of the heir. Adult children and unrelated beneficiaries might face higher taxation if the inheritance surpasses the exemption threshold.

New Jersey

In New Jersey, even small inheritances can be subject to tax if the beneficiary is not a close relative. The thresholds depend on relationship status, with rates typically running between 11% and 16% for those who do not qualify for exemptions.

Pennsylvania

Pennsylvania applies an inheritance tax that starts at 4.5% for direct descendants, whereas other categories might pay a higher percentage. The precise threshold for triggering the tax depends on the beneficiary’s relationship to the decedent.

Maryland

Maryland does not impose an inheritance tax per se; instead, it administers a state estate tax. The exemption for its estate tax is typically much lower than the federal exemption, around $ \text{\$5 million} $, and the tax liability is computed based on the full value of the estate.

Iowa

Iowa had historically imposed an inheritance tax; however, it is being phased out. Effective from January 1, 2025, the inheritance tax in Iowa has been eliminated. Prior to this phase-out, the tax rate would have been approximately 6% on inheritances over certain thresholds.

Comparative Table of Inheritance/ Estate Tax Thresholds and Rates

State	Type of Tax	Exemption Threshold	Applicable Rates	Notes
Kentucky	Inheritance Tax	Varies; low exemptions for unrelated heirs	4% - 16%	Exemptions for close relatives
Nebraska	Inheritance Tax	$ \text{\$17,000} $ approximately	1% - 18%	Depends on the beneficiary's relation
New Jersey	Inheritance Tax	Varies by relationship	11% - 16%	No exemption for non-relatives
Pennsylvania	Inheritance Tax	Threshold depends on relation	Starts at 4.5% for direct descendants	Higher rates for distant beneficiaries
Maryland	Estate Tax	$ \text{\$5 million} $ approx.	Variable	State estate tax instead of inheritance tax
Iowa	Inheritance Tax	Previously low threshold	Around 6% (no longer applicable in 2025)	Tax eliminated as of January 1, 2025

Interpreting the Numbers: What Do They Mean for Taxpayers?

The federal estate tax only kicks in if the estate’s gross value exceeds $ \text{\$13.99 million} $ per individual in 2025. This means that very few estates are likely to be affected by this federal tax in comparison to state-level inheritance taxes. For most U.S. citizens, the impact of federal estate taxation is minimal—unless dealing with extremely high-value estates.

In contrast, the state inheritance tax focuses on the beneficiary rather than the estate itself. As detailed above, the particular threshold that triggers an inheritance tax varies widely. In some states like Nebraska or New Jersey, even comparatively smaller inheritances can become liable for taxation if the relationship conditions do not qualify for exemptions. Beneficiaries who are not direct descendants or spouses generally may face a significantly different tax scenario.

Since inheritance tax is state-specific, understanding the exact rules applicable in the relevant jurisdiction is crucial. Consulting with a tax professional or a trusted estate planner can provide tailored advice to mitigate unexpected tax burdens.

Additional Considerations

Beyond the straightforward numbers and thresholds, there are several considerations that make inheritance and estate planning a nuanced field:

Changes in Exemptions Over Time

The federal estate tax exemption is subject to change. It is important to note that while 2025 sees a relatively high exemption, legislative changes or sunset provisions could revert the exemption amounts to previous levels, significantly affecting future tax obligations. Currently, most discussions indicate a possible reversion to about $ \text{\$7 million} $ per individual, adjusted for inflation, after 2025.

The Role of Gifting

Another tool in estate planning is the use of gifts during an individual’s lifetime. In 2025, individuals are allowed to gift up to $ \text{\$19,000} $ per recipient without incurring gift tax liabilities. For married couples, this limit doubles, allowing for strategic wealth transfers that can reduce the size of an estate that might be subject to either federal or state taxation.

Professional Advice

Because of the complexities involved with different states' rules and potential changes in federal laws, it is advisable to consult with tax professionals and estate planning experts. They can help structure your estate to reduce liabilities and even identify applicable credits and exemptions that could apply based on the relationship between donor and recipient.

Summary of Minimum Wealth Thresholds

The direct answer to the question of the minimum amount of wealth subject to inheritance tax varies significantly:

Federal Level: There is no federal inheritance tax as such; only the federal estate tax exists with a threshold of $ \text{\$13.99 million} $ per individual (or $ \text{\$27.98 million} $ for married couples) in 2025.
State Level: The minimum amount taxed varies: in states with inheritance taxes, small sums can trigger taxation depending on relationship status. For example, while key thresholds include approximately $ \text{\$17,000} $ in Nebraska, other states do not have a fixed minimum wealth level but instead tax based on tiers defined by the tax authority.

Consequently, if you are in a state with inheritance tax, the minimum wealth amount subject to tax is determined by both the statutory exemption in that state and your relationship with the decedent. This creates a situation where for some states, even relatively small inheritances might be taxable, whereas in others, generous exemptions mean that the tax might only affect larger transfers of wealth.