Estate Tax vs. Inheritance Tax: What's the Difference?
These two taxes are often confused — but they work very differently and affect different people. Here's a clear explanation of each.
Estate tax and inheritance tax are two different taxes that both involve transfers of wealth at death — and they're frequently confused. This guide explains the difference, who pays what, and whether either is likely to apply to your situation.
The Fundamental Difference
- Estate tax is paid by the estate (from estate assets) before assets are distributed to heirs. It's based on the total value of everything the deceased owned.
- Inheritance tax is paid by the individual who receives an inheritance. It's based on the value of what the specific heir receives.
These are separate taxes, and in some states, both can theoretically apply to the same transfer — though most states have neither.
Federal Estate Tax
The federal estate tax applies to estates above the federal exemption threshold. For 2024, the exemption is $13.61 million per individual ($27.22 million for married couples who use "portability"). Estates below this threshold pay no federal estate tax.
The practical reality: only a small fraction of US estates owe federal estate tax. If the total value of everything the deceased owned — including life insurance, retirement accounts, and real estate — is below $13.61 million, no federal estate tax is owed.
The sunset issue
The current high exemption amount is scheduled to sunset (be reduced by roughly half) at the end of 2025, returning to approximately $6–7 million, unless Congress acts. This is a major estate planning issue for high-net-worth families but doesn't affect most estates administered now.
The federal estate tax rate
For estates above the exemption, the top federal estate tax rate is 40%. The tax applies only to the value above the exemption — so an estate of $15 million would owe roughly 40% of $1.39 million ($15M - $13.61M).
Filing Form 706
The federal estate tax return (Form 706) is due 9 months after the date of death (15 months with an extension). Even if no tax is owed, the estate may need to file Form 706 to claim portability of the unused exemption for a surviving spouse. Consult a tax attorney or CPA for large estates.
State Estate Taxes
Several states impose their own estate taxes, often with lower exemption thresholds than the federal tax:
| State | Exemption (approximate) | Top Rate |
|---|---|---|
| Massachusetts | $2 million | 16% |
| Oregon | $1 million | 16% |
| Washington | $2.193 million | 20% |
| Connecticut | $12.92 million (matching federal) | 12% |
| Maine | $6.8 million | 12% |
| Minnesota | $3 million | 16% |
| Hawaii | $5.49 million | 20% |
| Illinois | $4 million | 16% |
| New York | $6.94 million | 16% |
| Vermont | $5 million | 16% |
| Maryland | $5 million | 16% |
| Rhode Island | $1.733 million | 16% |
| District of Columbia | $4.7 million | 16% |
Rates and exemptions change; verify current figures with a tax professional or the state's revenue department.
Inheritance Tax
Only six states impose an inheritance tax (as of 2024): Iowa (being phased out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Key features of inheritance taxes:
- Surviving spouses are typically exempt from inheritance tax in all states that have it
- Direct descendants (children, grandchildren) are often exempt or taxed at a very low rate
- The tax primarily affects assets left to siblings, nieces/nephews, friends, and non-family beneficiaries
- Maryland has both a state estate tax and an inheritance tax (the only state with both)
The Stepped-Up Basis: Not a Tax, but Tax-Relevant
Inherited assets generally receive a stepped-up cost basis — the basis is reset to fair market value at the date of death. This is not a tax itself, but it significantly reduces capital gains tax when heirs later sell inherited assets. See our article on capital gains tax when selling inherited property for details.
For the complete taxes after death guide, see our taxes after a death guide. For the final income tax return, see our article on how to file a final tax return for a deceased person.
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