Does a State Inheritance Tax Depend on Where the Heir Lives?

Or Does a State Inheritance Tax Depend on Where the Decedent Lived?

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NOTE: State laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.

In the U.S., an inheritance tax is a tax imposed by a state based on the privilege of an heir to receive the assets of a deceased person.

In other words, an inheritance tax is based on who inherits the deceased person's property, not on the overall value of the estate.

Currently, there are only six U.S. states that collect an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each of these six states has its own separate laws dictating who is exempt from the state inheritance tax and who will have to pay the tax. Regardless, for an heir to be potentially subject to a state inheritance tax, the deceased person had to either have lived in a state that collects a state inheritance tax, or owned real estate, had tangible personal property, or, in some states, owned business property, located in a state that collects a state inheritance tax.

How to Determine if Your Inheritance Will Be Subject to State Inheritance Taxes

The best way to understand if your inheritance will be subject to a state inheritance tax is to look at a few examples.

  • Kentucky inheritance taxes and Pennsylvania inheritance taxes. What if you live in California and you inherit your uncle's estate and he lived in Kentucky at the time of his death, will you owe any Kentucky inheritance taxes on your inheritance? The answer is yes since Kentucky is currently one of the six states that collect a state inheritance tax and under Kentucky law, you will be classified as a "Class B" heir who is not exempt from the inheritance tax. But what if the deceased person was your father? Then the answer is no, your inheritance will not be subject to any Kentucky inheritance taxes because you are classified as a "Class A" heir under Kentucky law and will, therefore, be exempt from paying any inheritance taxes. However, if your father lived in Pennsylvania, then your inheritance will be subject to Pennsylvania inheritance taxes because in Pennsylvania an inheritance that passes to a child or other descendant is subject to the Pennsylvania inheritance tax.
  • California inheritance taxes. Let's turn it around, for example, if you live in Kentucky or Pennsylvania and you inherit your uncle's estate and he lived in California at the time of his death, then will your inheritance be subject to Kentucky or Pennsylvania inheritance taxes? If your uncle didn't own any property located in Kentucky or Pennsylvania at the time of his death, then the answer is no, your inheritance will not be subject to Kentucky or Pennsylvania inheritance taxes, because your uncle was a California resident who did not own any property located in Kentucky or Pennsylvania, and California has not collected an inheritance tax since 1982. But what if your uncle who lived in California at the time of his death owned a house in Kentucky or in Pennsylvania when he died? Then your inheritance of the house will be subject to Kentucky or Pennsylvania inheritance taxes because it is physically located in a state that collects a state inheritance tax and you, as a niece or a nephew, are not exempt from paying state inheritance taxes.

The Bottom Line on State Inheritance Taxes

The examples above make it clear that an heir's inheritance will be subject to a state inheritance tax only if the following two conditions are met:

  1. The deceased person lived in a state which collects a state inheritance tax; and
  2. An heir is in a class of heirs that is not exempt from paying the applicable state's inheritance tax.

Aside from this, an heir's inheritance may be subject to state inheritance taxes if the deceased person owned real estate, tangible personal property or, in some states, business property, that is located in a state which collects a state inheritance tax.

However, the state where the person receiving the inheritance lives is irrelevant when it comes to figuring out if the inheritance will be subject to a state inheritance tax.

For an overview of the inheritance tax laws of the six states that collect them, refer to the State Inheritance Tax Chart. For detailed information about each state's inheritance tax laws, refer to the links provided above associated with each state's name.