Estate Tax vs. Inheritance Tax: Which States Actually Tax Your Heirs

Estate tax and inheritance tax get used interchangeably in everyday conversation, but they’re structurally different taxes, hit different people, and in 2026 exist in an almost entirely different set of states than most people assume.

The Structural Difference

Estate tax is levied on the estate itself, before assets are distributed — the tax bill depends on the total size of the estate, not on who inherits it. Inheritance tax is levied on the person receiving the inheritance, and the rate typically depends on that beneficiary’s relationship to the deceased — spouses and children are usually taxed at lower rates or exempted entirely, while more distant relatives and unrelated beneficiaries face higher rates.

Which States Actually Impose Each One in 2026

As of 2026, twelve states plus the District of Columbia impose their own estate tax, on top of the federal estate tax that only affects estates above the federal exemption (which sits in the tens of millions of dollars per person). Separately, only five states still impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — down from six after Iowa fully repealed its inheritance tax effective January 1, 2025. Maryland is the only state that layers both taxes on top of each other. Pennsylvania is notable because it taxes even direct descendants (children and grandchildren) at 4.5%, unlike the other inheritance-tax states, which generally exempt or minimally tax spouses and children.

Why This Matters for Where You Live and Where Heirs Live

State estate tax is based on where the deceased person lived (or owned real property), while inheritance tax in most states is based on where the deceased person lived, regardless of where the heir lives — so a Pennsylvania resident’s out-of-state child can still owe Pennsylvania inheritance tax. For anyone with a taxable estate approaching a state’s separate (and often much lower) estate tax exemption threshold, or heirs likely to inherit from a state with inheritance tax, this is a real planning variable that has nothing to do with the federal exemption most people assume is the only number that matters.

Written by Samuel, Certified Public Accountant

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