Inheritance Tax vs. Estate Tax: The 2026 Guide

What Is the Difference Between Inheritance Tax and Estate Tax?

Estate tax is levied on the total net value of a deceased person's estate before any assets are distributed; the estate pays it. Inheritance tax is levied on each beneficiary's share after they receive it; the heir pays it. The federal government imposes only an estate tax — there is no federal inheritance tax.

Key takeaways

• Estate tax: the estate pays before heirs receive anything. Inheritance tax: each heir pays after receiving their share — and the rate turns on their relationship to the deceased, not the estate's size.
• The 2026 federal estate tax exemption is $15 million per person under the One Big Beautiful Bill Act (OBBBA) — roughly 99.9% of estates owe the IRS nothing.
• Five states levy inheritance tax in 2026: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa fully repealed its inheritance tax for deaths on or after January 1, 2025.
• Pennsylvania is the only state that taxes adult children's inheritance (at 4.5% under 72 P.S. § 9116) — every other inheritance-tax state exempts children entirely.
• Maryland is the only U.S. state with both an estate tax and an inheritance tax.

How Does Estate Tax Work?

Estate tax is calculated on the taxable estate: roughly the gross value of everything the deceased owned, minus debts, administration expenses, charitable deductions, and the unlimited marital deduction for assets passing outright to a surviving U.S.-citizen spouse.

At the federal level under 26 U.S.C. § 2001, only estates above the exemption amount face tax. The OBBBA permanently set that exemption at $15 million per individual starting January 1, 2026, and indexed it for inflation from 2027 onward. Federal estate tax rates start at 18% and reach a top rate of 40% on the taxable portion above the exemption.

The executor files IRS Form 706 within nine months of the date of death — with a six-month extension available under 26 U.S.C. § 6075(a) — and pays any tax owed from estate assets before distributions to heirs. Beneficiaries receive what remains; they do not pay estate tax themselves.

Married couples get one additional lever: portability. If the first spouse to die leaves unused exemption, the executor can elect portability on Form 706, passing that unused amount to the surviving spouse. That effectively shelters up to $30 million for a married couple. For the full breakdown of 2026 federal changes and planning strategy, see our 2026 estate tax exemption guide. If your spouse is not a U.S. citizen, special rules apply to the marital deduction and portability — see our guide on estate tax planning for non-citizen spouses.

How Does Inheritance Tax Work?

Inheritance tax is an entirely different mechanism. It is charged to the beneficiary, not the estate, and its rate depends entirely on who is receiving the assets — not on how large the estate is. A $60,000 bequest to a friend can be taxable. A $6 million bequest to a daughter can be tax-free. The estate's total size is irrelevant in states that levy this tax.

In every inheritance-tax state, a surviving spouse pays zero. Children and grandchildren are exempt in four of the five states. Pennsylvania is the sole exception: adult children over age 21 pay 4.5% on everything they inherit under 72 P.S. § 9116. Rates climb as the relationship grows more distant — to 12% for Pennsylvania siblings and 15% for friends, unmarried partners, nieces, and nephews.

One nuance matters enormously for planning: the tax follows where the deceased lived — not where the heir lives. A niece in Florida who inherits from a New Jersey uncle is taxed the same as a niece in Trenton. Real estate located physically in a taxing state is also subject to that state's inheritance tax, even if the deceased lived elsewhere.

The $500K Test: What the Same Estate Costs Six Different Heirs

Most articles on this topic spend most of their time on the federal estate tax — the $15 million threshold that affects fewer than 0.2% of estates. Here's the exercise none of them run: what does an ordinary $500,000 estate actually cost different heirs in different states?

Suppose a single person dies in 2026 with a net estate of $500,000 — a home worth $350,000 and $150,000 in savings. No spouse. The estate is far below the $15 million federal threshold, so no federal estate tax applies in any scenario. The only variables are the state of death and the heir's relationship to the deceased.

Every row uses the same $500,000 gross estate. The adult daughter in Texas owes nothing. Her Pennsylvania counterpart owes $22,500 — Pennsylvania's inheritance tax has no minimum threshold, applying from the first dollar. The Pennsylvania sibling's $60,000 bill is the most jarring figure: most people assume siblings are close family who pay little or nothing. They are not exempt.

For the New Jersey sibling: $500,000 minus the Class C $25,000 exemption = $475,000 taxable at 11% = $52,250 owed under N.J. Stat. § 54:34-1. For the New Jersey friend (Class D): no exemption, 15% on the full amount = $75,000 owed.

If the Pennsylvania sibling pays within three months of death, they receive a 5% discount under 72 P.S. § 9142 — saving $3,000 on a $60,000 bill. That discount is real money, and claiming it requires filing quickly.

Pennsylvania also has a specific rule for retirement accounts: IRAs and 401(k)s are generally subject to inheritance tax if the decedent was over age 59½ at the time of death. A child inheriting a $150,000 IRA from a parent in Pennsylvania faces $6,750 in inheritance tax on the account — on top of federal income tax owed when funds are eventually withdrawn.

Which States Collect Inheritance Tax in 2026?

Five states levy inheritance tax on 2026 deaths. Iowa's full repeal took effect for deaths on or after January 1, 2025.

New Jersey deserves a separate call-out. The state repealed its estate tax effective January 1, 2018 — but the inheritance tax under N.J. Stat. § 54:34-1 remains fully active. Many executors assume New Jersey has no death taxes. It does. Worse, New Jersey will not release estate assets (bank accounts, real estate) until it issues a tax waiver. If the eight-month deadline passes and the inheritance tax return hasn't been filed, interest accrues at 10% per year on unpaid balances.

Pennsylvania stands apart from every other state in this list: it is the only one that taxes adult children's inheritance. In Kentucky, Maryland, Nebraska, and New Jersey, children and grandchildren pay zero. In Pennsylvania, a child inheriting a $400,000 house owes $18,000 to the state before the deed transfers. Many families — especially those in Pennsylvania — discover this only during estate administration, when the house can't easily be sold quickly enough to cover the bill.

If you own property in Pennsylvania or New Jersey, the choice of who inherits which asset is a direct tax decision, not just a sentimental one.

Which States Have Estate Tax in 2026?

Twelve states plus Washington, D.C. impose estate taxes separately from federal law. Each has its own exemption threshold, rates, and rules. Owing zero federal estate tax does not mean owing zero state estate tax.

Washington State made a significant mid-year change: under SB 6347, the exemption reset to $3 million and the top rate dropped from 35% to 20% for deaths on or after July 1, 2026. If you have a Washington estate plan drafted before this change, verify that your plan still reflects the current numbers — our Washington estate tax law changes guide for 2026 covers the full details.

Oregon's $1 million exemption is the sharpest gap with the federal threshold. A family with a modest home and retirement savings can easily exceed $1 million in Oregon — and owe state estate tax — while owing the IRS nothing.

What Your Will Has to Do with Inheritance Tax

A will does not reduce estate tax — the estate pays that before distributions happen. But a will directly controls inheritance tax exposure in the five states that still levy it, because it determines who receives each specific asset, which is the only variable that changes the inheritance tax rate.

Redirecting a $200,000 IRA from a sibling to a spouse eliminates Pennsylvania inheritance tax on that asset entirely — zero instead of $24,000. Redirecting it from a friend to an adult child cuts the tax from $30,000 to $9,000. The asset is identical; the planning decision is not.

Your will also names the executor, who is personally responsible for filing inheritance tax returns on time, claiming early-payment discounts, and securing state waivers before accounts can be released. Choosing the right executor and giving them clear written guidance can save thousands in avoidable interest and penalties. For help choosing that person, see our guide to beneficiary designations and how they interact with your will — because retirement accounts, life insurance, and jointly held property often pass outside the will entirely, and their beneficiary designations affect inheritance tax exposure just as much as the will itself.

In most inheritance-tax states, life insurance paid directly to a named beneficiary (rather than to the estate itself) is exempt from inheritance tax, regardless of the beneficiary's class. Structuring policies correctly is one of the highest-leverage tax moves available to families in taxing states.

If you don't have a will that reflects current law and current beneficiaries, create your will online with Pactlio's state-specific guided interview. Pactlio Wills covers all 50 states, generates execution instructions (including witness and self-proving affidavit requirements where available), and produces a complete draft for attorney review.

Common Mistakes to Avoid

• Assuming no state tax applies because the federal threshold isn't met. The $15 million federal exemption exempts almost everyone from IRS estate tax. It does nothing to shield estates from Oregon's $1 million state exemption or Pennsylvania's no-minimum inheritance tax.
• Confusing the two taxes after New Jersey's 2018 estate tax repeal. NJ abolished its estate tax but kept inheritance tax under N.J. Stat. § 54:34-1. Executors who believe NJ has no death taxes will miss the eight-month inheritance tax deadline — and the 10% annual interest that follows.
• Distributing assets before state tax waivers are issued. In New Jersey, banks will not release accounts without a state-issued tax waiver (Form L-8 for financial assets, Form L-9 for real estate). Distributing funds prematurely exposes the executor to personal liability.
• Missing Pennsylvania's 5% early-payment discount. Paying within three months of death saves 5% of the total tax bill under 72 P.S. § 9142. On a $60,000 bill, that is $3,000 returned for filing quickly — an easy win that requires only an estimated pre-payment to the Register of Wills.
• Ignoring retirement accounts in inheritance-tax states. IRAs and 401(k)s pass by beneficiary designation and avoid probate — but they do not automatically avoid inheritance tax. Pennsylvania generally taxes them when the decedent was over age 59½. The inheritance tax is due within nine months even though income taxes on withdrawals are owed separately over years.
• Not updating your will after moving states. A will drafted in Florida may be legally valid in Pennsylvania, but it was not written with Pennsylvania's inheritance tax structure in mind. Who inherits which asset class is a tax decision in a taxing state, and a stale will from a no-tax state rarely reflects those tradeoffs.

Sources

• IRS Estate and Gift Tax Overview: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
• IRS Form 706 and Instructions: https://www.irs.gov/forms-pubs/about-form-706
• 26 U.S.C. § 2001 (Federal estate tax): https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section2001
• 26 U.S.C. § 2010 (Unified credit / exemption): https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section2010
• 26 U.S.C. § 6075(a) (Estate tax return deadline): https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section6075
• Tax Foundation — Estate and Inheritance Taxes by State, 2026: https://taxfoundation.org/data/all/state/estate-inheritance-taxes/
• Pennsylvania Department of Revenue — Inheritance Tax: https://www.pa.gov/agencies/revenue/resources/tax-types-and-information/inheritance-tax
• 72 P.S. § 9116 (Pennsylvania inheritance tax rates): https://www.legis.state.pa.us/cfdocs/legis/LI/consCheck.cfm?txtType=HTM&ttl=72&div=0&chpt=91&sctn=16&subsctn=0
• 72 P.S. § 9142 (Pennsylvania 5% early-payment discount): https://www.legis.state.pa.us/cfdocs/legis/LI/consCheck.cfm?txtType=HTM&ttl=72&div=0&chpt=91&sctn=42&subsctn=0
• New Jersey Division of Taxation — Inheritance and Estate Tax: https://www.nj.gov/treasury/taxation/inheritance-estate/
• N.J. Stat. § 54:34-1 (New Jersey inheritance tax): https://law.justia.com/codes/new-jersey/chapter-34/section-54-34-1/
• N.J. Stat. § 54:35-3 (New Jersey filing deadline): https://law.justia.com/codes/new-jersey/chapter-35/section-54-35-3/
• Washington SB 6347 (2026 estate tax rate rollback): https://app.leg.wa.gov/billsummary?BillNumber=6347&Year=2026

This article is general information, not legal advice. Laws vary by jurisdiction. Pactlio generates professional drafts for review — have a licensed attorney review anything important.