Yes – inheritance taxes can be deductible, but only under specific conditions in U.S. tax law. According to a 2024 national estate planning survey, nearly 70% of Americans are unsure about inheritance tax deduction rules, potentially costing them thousands in missed tax savings.
In this comprehensive guide, you’ll learn:
- 🏛️ Federal vs. state rules for deducting inheritance taxes and which laws apply to you.
- 💡 Key differences between inheritance tax and estate tax (and why that matters for deductions).
- ⚖️ Legal ways to deduct state inheritance taxes on federal returns (and crucial limits like the SALT cap).
- 🚫 Common mistakes to avoid when dealing with inheritance tax deductions (to stay compliant and save money).
- 📊 Real-life examples and scenarios illustrating when you can and cannot deduct these taxes.
Inheritance Tax vs. Estate Tax: Why the Difference Matters for Deductions
It’s crucial to distinguish inheritance tax from estate tax because deductibility rules differ for each. An inheritance tax is imposed on beneficiaries who receive assets from a deceased person. This tax is levied by certain state governments – and only the people inheriting in those states pay it, usually based on their relationship to the deceased and the amount inherited. (Both inheritance and estate taxes are often collectively called “death taxes” in discussions.)
In contrast, an estate tax is a tax on the decedent’s estate itself, taken out of the total estate value before distributions to heirs. The U.S. federal government charges a hefty estate tax (up to 40%) on estates above a high exemption threshold (over $12 million per individual in 2025). Additionally, 12 states (plus Washington, D.C.) impose their own state estate taxes – often with much lower exemption limits than the federal government (for instance, one state taxes estates above just $1 million). Importantly, the federal estate tax is paid by the estate (via the executor) not by individual heirs.
Only a handful of states still have inheritance taxes as of 2025. States with inheritance taxes include Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa also had an inheritance tax recently, but it’s being fully repealed by 2025.
Each of these states sets its own rates and exemptions. For example, Pennsylvania taxes most non-spouse heirs at 4.5%, while Nebraska can tax distant relatives up to 18%. By comparison, Maryland uniquely charges both an estate tax and an inheritance tax.
State Inheritance Tax Rates (2025)
| State | Inheritance Tax Details (2025) |
|---|---|
| Kentucky | 4%–16% tax on inheritances, but no tax on close relatives (spouse, parent, child, sibling are exempt). |
| Maryland | 10% flat inheritance tax on transfers to non-close heirs (spouse, children, etc. are exempt). (Maryland also imposes a separate estate tax up to 16%.) |
| Nebraska | 1% for immediate relatives (with large exemptions), up to 18% for more distant heirs (with only small exemptions). |
| New Jersey | 11%–16% tax on inheritances to certain non-exempt beneficiaries. (Spouses, children, and parents pay no inheritance tax; more distant heirs may be taxed at these rates after small exemptions.) |
| Pennsylvania | 0% for surviving spouses and children under 21; 4.5% for lineal heirs (adult children, grandchildren, etc.); 12% for siblings; 15% for other heirs. |
| Iowa | 5%–15% (Iowa’s inheritance tax is being phased out by 2025; it previously exempted close relatives entirely and taxed others within this range.) |
Why does this difference matter for deductions? It affects who pays the tax and what kind of tax return it relates to. If you pay an inheritance tax as a beneficiary, you’ll be looking at your personal income tax return for any deduction. But if an estate pays a tax, any deduction happens on the estate’s own tax filings (such as the federal estate tax return). Understanding which tax you’re dealing with is the first step to knowing if you can deduct it.
Federal Estate Tax Deduction: Cut Your Bill with State “Death Taxes”
Large estates may benefit from a special deduction on the federal estate tax return (Form 706) for any state “death taxes” paid. In other words, if an estate pays taxes to a state (either state estate tax or state inheritance tax), those amounts can be deducted from the taxable estate before calculating the 40% federal estate tax. This deduction directly reduces the federal estate tax bill. For example, if a $1 million state estate tax was paid, the estate’s value for federal tax is lowered by $1 million – saving up to $400,000 in federal tax (since 40% of $1 million is $400k).
This deduction prevents double-taxation to a degree, although it’s not a full credit. Prior to the mid-2000s, the IRS actually gave a dollar-for-dollar credit for state death taxes, which fully offset many state taxes. Today, it’s a deduction instead, meaning estates still bear some of the cost of state taxes. High-net-worth families often work with estate planning attorneys to coordinate state and federal taxes, ensuring the estate takes advantage of every deduction available.
It’s important to note that only estates above the federal exemption (approximately $13 million per person in 2025) file a federal estate tax return at all. For those estates, paying a state tax can at least reduce the federal bite. Both state estate taxes and state inheritance taxes qualify for this deduction, as long as the tax is paid out of the estate. (If beneficiaries paid a state inheritance tax out of their own pocket, the estate wouldn’t list it on Form 706 – but those beneficiaries might have another deduction, which we’ll cover next.)
Don’t Miss This Deduction: How to Claim Inheritance Tax on Your 1040
If you personally paid a state inheritance tax, you may be able to deduct it on your federal income tax return. The catch is you’ll need to itemize deductions on Schedule A (Form 1040) instead of taking the standard deduction. State inheritance taxes are deductible as an “Other Tax” on Schedule A – alongside other state and local taxes. This falls under the umbrella of the SALT deduction (State and Local Taxes), which lets you write off taxes like state income tax, property tax, and yes, inheritance tax.
However, there are important limits. Since 2018, the total SALT deduction (including any inheritance tax you paid) is capped at $10,000 per year for single and married-filing-jointly taxpayers ($5,000 if married filing separately). This means even if you paid, say, $20,000 in state inheritance tax, you can only deduct up to $10,000 (combined with your other state taxes) on Schedule A. High-tax state residents often hit this $10k cap just with income and property taxes, so an inheritance tax might not increase their deduction at all.
Another consideration is whether itemizing makes sense for you. The standard deduction for 2025 is around $13,000 (single) and $26,000 (married filing jointly). You should compare your total itemized deductions (including the inheritance tax and other deductible expenses) to the standard deduction. If itemized deductions don’t exceed the standard amount, you’re usually better off taking the standard deduction – in which case the inheritance tax wouldn’t actually save you anything on your federal return.
How to claim it: If you do itemize, report your state inheritance tax on Schedule A in the line for “Other taxes you paid.” You would list it as “State inheritance tax” and include the amount. This way, the IRS knows you’re claiming it as a state/local tax deduction. Just remember, you won’t get any benefit if you’ve already maxed out the $10k SALT limit or if your itemized total doesn’t surpass your standard deduction – so yes, inheritance taxes can be deducted on your 1040, but only if you itemize and within the SALT limits.
🚫 Avoid These Inheritance Tax Deduction Mistakes That Could Cost You
Even savvy taxpayers can slip up when dealing with inheritance and estate tax deductions. Here are some common mistakes to steer clear of:
- Trying to deduct taxes that aren’t eligible: A frequent error is attempting to deduct the federal estate tax or other non-deductible fees on your income tax return. Remember, federal estate taxes are not deductible on a personal 1040. Only certain state-imposed taxes (like state inheritance or estate taxes) qualify, and even those have specific rules.
- Not itemizing when you paid inheritance tax: If you paid a significant state inheritance tax but stick with the standard deduction out of habit, you could miss out on a deduction. Failing to itemize in the year you paid an inheritance tax means you won’t reap any federal tax benefit from that payment. Always review whether itemizing (to deduct that tax) gives you a better outcome for that year.
- Overlooking the SALT cap: Some heirs assume they can deduct every dollar of state tax they paid, only to find out the $10,000 SALT limit caps their deduction. For example, if you paid $15,000 in inheritance tax, at most $10k is deductible if you have no other state taxes – and even less if you do. Ignoring this limit when planning can lead to unpleasant surprises (and potentially a higher tax bill than expected).
- Double-dipping or misallocating deductions: Make sure the right taxpayer claims the deduction. If the estate paid a state death tax, the deduction belongs on the estate’s federal estate tax return – not on your personal return. Conversely, if you paid a state inheritance tax from your inheritance, you (not the estate) should claim the deduction by itemizing. Don’t try to claim the same tax on two different returns; the IRS will catch it.
- Missing the deduction on an estate tax return: Serving as an executor is complex, and one costly mistake is forgetting to deduct state taxes on the federal estate return. If the estate paid, say, $500,000 to a state for estate or inheritance taxes, that should be promptly deducted on Form 706. Omitting that deduction means the estate could overpay federal tax by up to 40% of that amount (hundreds of thousands of dollars!). Professional guidance can help avoid such an expensive oversight.
📊 Real-Life Examples & Scenarios: When Inheritance Tax Is (and Isn’t) Deductible
Let’s bring all these rules together with a few simplified scenarios:
Scenario 1: Beneficiary Inherits and Itemizes – A deductible outcome. Jane inherits $100,000 from her aunt who lived in New Jersey. As a niece, she owes about $10,000 in NJ inheritance tax. Jane also has other itemized deductions (like mortgage interest) that bring her total deductions to $20,000, well above the $13,000 standard deduction. She decides to itemize and includes the $10,000 inheritance tax on her Schedule A. This reduces her taxable income by $10,000. If she’s in the 24% tax bracket, that saves her roughly $2,400 in federal tax.
| Jane’s Tax Deduction | Amount/Outcome |
|---|---|
| Inheritance tax paid to New Jersey | $10,000 |
| Total itemized deductions (including inheritance tax) | $20,000 |
| Standard deduction (for comparison) | $13,000 |
| Did Jane itemize? | Yes (itemized was higher than standard) |
| Federal tax savings from $10k deduction | Approximately $2,400 saved (24% of $10k) |
Scenario 2: Beneficiary Hits the SALT Cap – Limited deduction. Mike inherits a large sum from a distant relative in Nebraska, incurring $45,000 of state inheritance tax (Nebraska’s rates for non-relatives are high). Mike already paid about $8,000 in state income and property taxes this year. When he itemizes, the SALT cap limits his total state tax deduction to $10,000. This means out of his $45,000 inheritance tax bill, only $2,000 ends up being deductible (because $8k + $2k = $10k cap). The remaining $43,000 of state tax provides zero federal deduction. Assuming Mike is in a 35% tax bracket, that $2,000 deduction saves him only around $700 on his federal taxes – a drop in the bucket compared to the $45k tax he paid.
| Mike’s Tax Deduction | Amount/Outcome |
|---|---|
| Inheritance tax paid to Nebraska | $45,000 |
| Other state taxes paid (income/property) | $8,000 |
| Deductible on Schedule A | $10,000 (SALT limit reached) |
| Inheritance tax actually deducted | $2,000 (out of $45k paid) |
| Federal tax savings from deduction | About $700 saved (35% of $2k) |
| Inheritance tax with no federal offset | $43,000 effectively not deductible |
Scenario 3: Estate Tax Deduction for State Tax – Estate saves on federal tax. The Smith Estate has a gross value of $20 million and is subject to federal estate tax. It also owes a $2,000,000 estate tax to the state (imagine this estate is in New York, which has a state estate tax). On the federal estate tax return, the executor deducts that $2 million state tax, reducing the taxable estate from $20M to $18M. The federal estate tax is 40%, so this deduction cuts the federal tax bill by $800,000 (40% of $2M). Instead of owing $3.2 million in federal tax (which would be 40% of the full $8M above the exemption), the estate owes roughly $2.4 million. By using the deduction, the estate’s combined tax hit is far lower than it would have been without that deduction.
| Smith Estate Tax Breakdown | Amount |
|---|---|
| Gross estate value | $20,000,000 |
| State death tax paid (New York estate tax) | $2,000,000 |
| Federal taxable estate after deduction | $18,000,000 |
| Federal estate tax saved by deduction | $800,000 (40% of $2M) |
| Federal estate tax due (after deduction) | $2,400,000 (instead of $3,200,000) |
As you can see, understanding the rules allows both individual heirs and estates to reduce tax liabilities when possible. Each scenario illustrates how planning and proper filing make a big difference in the outcome.
By the Numbers: Key Facts and Laws on Inheritance Tax Deductions
To fully grasp this topic, it helps to know some statistics and legal background:
- Tiny fraction of estates pay federal estate tax: Only about 0.2% of U.S. estates end up owing any federal estate tax under current law. That’s roughly 2 out of every 1,000 deaths – a testament to the high federal exemption (over $12 million per individual in 2025). However, this could change: the exemption is scheduled to drop by about half in 2026 (when tax laws enacted in 2017 expire). If that happens, more families may find their estates subject to federal tax, making deductions for state taxes even more significant.
- Few states levy inheritance taxes (and the list is shrinking): As of now, only five states impose a true inheritance tax. Many states used to have them but repealed them over the years – for example, Indiana, Ohio, and Tennessee eliminated their inheritance taxes in the 2010s, and Iowa’s will be gone by 2025. This trend means fewer people face inheritance taxes today than decades ago. Still, in states like Pennsylvania or Nebraska, thousands of heirs each year pay these taxes, so it remains relevant in those jurisdictions.
- Close relatives often pay little or nothing: Even in states with inheritance tax, immediate family usually get a break. Spouses are 100% exempt in every state (no inheritance tax on what a husband or wife inherits). Children and other lineal descendants often either pay no tax or a reduced rate. For instance, in Pennsylvania, children pay 0% if they’re under 21 (and 4.5% otherwise), while in Kentucky close relatives are exempt. This means inheritance taxes tend to hit more distant relatives or non-family heirs the hardest – those are the folks most likely to be looking at deduction options.
- IRS rules explicitly allow the deduction: The ability to deduct state inheritance taxes on a federal return isn’t a loophole – it’s written into the tax code and IRS forms. On Schedule A (Itemized Deductions), the IRS includes state inheritance taxes in the category of deductible taxes (under “Other taxes”). Likewise, IRS Code Section 2058 provides for the deduction of state death taxes on the federal estate tax return. In short, the law recognizes these taxes and lets you deduct them within the stated limits.
- Historical change from credit to deduction: Prior to 2005, the federal estate tax offered a credit for state death taxes (directly reducing federal tax owed by the amount paid to states, up to a limit). Congress phased out that credit by 2005 (as part of 2001 tax reforms) and replaced it with a deduction. As a result, estates now get a deduction rather than a dollar-for-dollar credit – a less valuable break, which means state taxes hit estates harder than before. Notably, this change prompted many states to reduce or eliminate their own death taxes after 2005, since estates suddenly felt the full bite of those state taxes.
Keep in mind, tax laws continue to evolve. The SALT cap is set to expire after 2025 (potentially allowing full deduction of state taxes again), and estate tax thresholds will shift. Staying informed on law changes is key, especially if you expect to deal with a significant inheritance or estate in the coming years.
For example, the estate of musician Prince (who died in 2016) was valued at roughly $150 million, facing about a 40% federal estate tax and a 16% Minnesota estate tax. By deducting the state tax (approximately $25 million) on the federal return, the estate could reduce its federal tax bill by around $10 million (saving 40% of that $25M). Even so, Prince’s estate still paid tens of millions in taxes, illustrating both the benefit of the deduction and its limits.
Pros & Cons of Deducting Inheritance Taxes
| Pros | Cons |
|---|---|
| Lowers your federal tax bill – reduces taxable income (for heirs) or taxable estate (for estates), saving money. | Limited by tax rules – subject to the $10k SALT cap and only available if you itemize (no benefit under standard deduction). |
| Mitigates double taxation – gives back some relief on state inheritance/estate taxes so you don’t pay full tax on tax. | Not a full credit – it only partially offsets state taxes (e.g. a deduction saves a fraction of what a credit would). |
| Encourages proactive planning – by knowing the deduction exists, you can arrange for the estate or yourself to pay taxes in a way that maximizes deductions. | Complex to claim properly – requires correct filing (Schedule A or estate tax form) and understanding of rules, which can be daunting without advice. |
Smart Planning: Reducing Taxes and Maximizing Deductions
- Have the estate pay inheritance taxes if possible: In states with inheritance tax, a will or trust can direct the estate to pay that tax on behalf of the heirs. If the estate is subject to federal estate tax, this turns the inheritance tax into a deductible expense on the estate’s federal tax return – potentially cutting the combined tax bill. (If heirs pay it directly, the estate gets no federal deduction.)
- Time your itemized deductions: If you know you’ll be paying inheritance tax in a given year, plan other deductible expenses in that year too. For example, bunch charitable donations or elective medical expenses into the same tax year you’ll be itemizing for the inheritance tax. Maximizing your itemized deductions in one year can yield a bigger tax saving than spreading deductions over two years.
- Stay informed on law changes: Tax rules change. The SALT cap is set to expire after 2025 (potentially allowing full deduction of state taxes again), and estate tax thresholds will shift (the federal exemption drops in 2026, for instance). Keep up with federal and state law changes or work with a financial advisor, especially if you expect a large inheritance or have an estate plan – new laws could open up or close off deduction opportunities.
- Seek professional advice: Handling estate and inheritance taxes can get complicated. Estate planners, tax attorneys, or CPAs can help structure your affairs to minimize taxes and ensure you claim every deduction you’re entitled to. Given the high stakes (potentially thousands or even millions in taxes), expert guidance is often well worth it.
- Consider charitable bequests: Money or property left to charity isn’t subject to inheritance or estate tax. Charitable bequests are deductible from the taxable estate for federal (and often state) estate tax purposes. This strategy can significantly cut down the tax bill while supporting worthwhile causes.
Frequently Asked Questions (FAQs)
Can I deduct inheritance tax on my federal income tax return?
Yes. State inheritance taxes can be deducted if you itemize your deductions, but the benefit is limited by the $10,000 SALT cap (and zero if you take the standard deduction).
Are federal estate taxes deductible on a personal tax return?
No. You cannot deduct the federal estate tax on any individual income tax return – it’s a transfer tax on the estate itself, not an expense you can write off.
Is there a federal inheritance tax?
No. The U.S. federal government does not impose an inheritance tax on heirs. Only a federal estate tax exists (on very large estates), and a few states levy inheritance taxes on beneficiaries.
Does everyone have to pay inheritance tax when they inherit money?
No. Most heirs pay no inheritance tax. Only a few states charge inheritance tax, and even there, close relatives (like spouses and children) are often exempt or pay very little.
Is inherited money considered taxable income by the IRS?
No. Inherited cash or assets are generally not counted as taxable income on your federal tax return. You typically do not have to report inheritances as income.
Can an estate deduct state inheritance or estate taxes on the federal estate tax return?
Yes. Any state “death taxes” (estate or inheritance tax) paid by the estate are deductible on the federal estate tax return, reducing the taxable estate and the federal estate tax due.
If I live in a state with no inheritance tax, does that mean I won’t owe any inheritance tax?
No. It’s the laws of the decedent’s state (and the location of inherited property) that determine any inheritance tax. Even if you live in a no-tax state, you might owe tax to a state where your benefactor lived or owned property.