For ordinary families, the federal government has largely stepped out of the inheritance picture in 2026, Pierce Atwood confirmed, leaving state capitals as the only level of government most heirs still need to watch.
Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania levy their own inheritance tax, charged directly to the person who receives the money, Taxstra reported.
A niece inheriting $200,000 from a Pennsylvania aunt would owe the state $30,000 at the 15% rate for non-lineal heirs, according to the Pennsylvania Department of Revenue, even if the niece lives in a state with no such levy, because the tax follows the deceased’s domicile, not the heir’s home address, Taxstra confirmed.
Creative Planning noted that families focused on the federal exemption often overlook state-level inheritance taxes that can create material liability, even on smaller estates.
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How the federal tax code shields inherited money from the IRS
Internal Revenue Code (IRC) Section 102(a) excludes property received through a gift, bequest, devise, or inheritance from gross income, so inherited cash, stock, or real estate never appears on Form 1040 as taxable income.
The federal estate tax under Section 2001 kicks in only above a $15 million per-person threshold, a figure the One Big Beautiful Bill Act (OBBBA) permanently locked in, according to Creative Planning.
Zach Cox, tax director at Creative Planning, warned in a firm analysis that families focused on the permanent federal exemption may overlook the state-level tax bills that can arise even on smaller estates.
<strong>The 2026 changes to the federal exemption are a welcome relief for many high-net-worth families, but they don’t erase the need for careful state-level planning. We regularly see clients who fall well below the federal threshold yet still face a meaningful state estate or inheritance tax bill</strong>.
The gap between federal protection and state exposure is where most inheritance tax bills originate, and each of the five states defines heir classifications and exemptions differently.
5 states charge inheritance tax based on heir’s relationship to the deceased
Under KRS 140.070, Kentucky exempts Class A heirs (typically spouses, children, grandchildren, and parents), expanding the category in 2026 to include nieces and nephews. It also taxes Class B (aunts and uncles, sons and daughter-in-law, etc.) at 4% to 16% after a $1,000 exemption and Class C (cousins, friends, unrelated individuals, etc.) at 6% to 16% after a $500 exemption.
Pennsylvania charges lineal descendants 4.5%, siblings 12%, and everyone else (including nieces, nephews, and unrelated friends) 15%, according to the Pennsylvania Department of Revenue.
New Jersey sorts beneficiaries into lettered classes, with Class D heirs taxed at 15% on the first $700,000 and 16% on amounts above that threshold, with no small-dollar exemption, the New Jersey Division of Taxation showed.
Maryland applies a flat 10% to non-exempt heirs and is the only state that also imposes an estate tax on estates above $5 million, Taxstra reported.
Iowa was the sixth inheritance-tax state until its repeal took full effect on Jan. 1, 2025, leaving five states with the levy.
The deceased’s address determines which state collects
A Florida resident who inherits from a Pennsylvania aunt owes Pennsylvania, and a Pennsylvania resident who inherits from a Florida parent owes nothing, because the collecting state is always the state where the deceased was legally domiciled at death.
Both Pennsylvania and Kentucky tax a resident decedent’s stocks, bonds, and bank accounts, regardless of where those assets are held. Only real property physically in the taxing state is taxable for nonresident decedents, Taxstra and the Kentucky Department of Revenue confirmed.
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Filing deadlines carry financial consequences because Pennsylvania requires the inheritance tax return within nine calendar months of death. Heirs who pay within three months receive a 5% discount on the total tax owed, which on a $30,000 bill saves $1,500.
Kentucky offers the same discount for tax paid within nine months, the Kentucky Department of Revenue showed.
Nebraska’s inheritance tax is collected at the county level, adding complexity for heirs whose deceased relative owned property in multiple counties, according to Nebraska Public Media.
Planning moves that can shrink or eliminate a state inheritance tax bill
Pennsylvania claws back gifts exceeding $3,000 per recipient made within one year before death, adding those amounts to the taxable inheritance, Pennsylvania Department of Revenue confirmed.
Bryan Martin, managing partner of Taxstra, noted that inheritance tax rates vary based on the beneficiary’s relationship to the deceased and that strict filing deadlines apply.
Martin also noted that leaving individual retirement accounts to charity eliminates both the inheritance tax and income tax on distributions, making cash or stepped-up stock a better bequest for family members.
Nebraska lawmakers have debated lowering the rate for remote relatives from 11% to 3%, though the measure had not passed as of October 2026. The rate schedule in effect at the time of death determines the actual bill, the Nebraska Examiner reported.
What heirs in these 5 states need to confirm before a tax bill arrives
The federal tax code gives inherited wealth a broad exemption that most families will never outgrow, but that protection ends where five state borders begin.
Cox warned that a coordinated approach across estate planning, tax strategy, and investments helps ensure a family’s plan holds up under current and future rules.
Heirs who discover a state inheritance tax only after a relative dies face a narrowing window, Taxstra confirmed.
Confirming the deceased’s domicile, identifying the applicable tax rate, and checking the filing deadline and any early-payment discount can determine the final bill.
Depending on the circumstances, the tax could be $30,000 for a Pennsylvania non-lineal heir, $17,600 for a Nebraska remote relative inheriting $200,000 after a $40,000 exemption at the 11% rate, or $0 for an exempt spouse.
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