Estate Tax Versus Inheritance Tax: Who Takes the Bite
Estate tax and inheritance tax are distinct: one is levied on the estate and the other on assets received by beneficiaries, with laws varying by state.
Time to decipher a couple of estate planning terms. If you’ve ever wondered about estate tax versus inheritance tax, you’re not alone. The names sound similar. The bite, however, comes from different places. One tax is paid by an estate before anyone receives a penny. The other can be owed by individual heirs after they receive property. Understanding estate tax versus inheritance tax helps you plan with fewer surprises.
An estate tax is charged on the estate’s total taxable value and is paid by the estate before distributions go to heirs. The federal government levies this tax, and some states do too. For 2025, the federal basic exclusion amount is $13.99 million per person—estates under that number generally owe no federal estate tax.
An inheritance tax is different. It’s a state tax some heirs may owe based on what they personally receive and their relationship to the person who has passed. Only a handful of states impose it today.
Several states have an estate tax. Their exemptions are often far lower than the federal exclusion, so an estate can owe state tax even when no federal tax is due. This is where the difference really matters. An estate might dodge federal tax yet still trigger a state estate tax—or leave heirs facing an inheritance tax bill. Check your state’s rules; lists change and thresholds vary widely.
Example #1: Harper’s condo and the cousin question
Harper lives in Pennsylvania and owns a $480,000 condo, $70,000 in savings, and a beloved classic guitar. She leaves everything to her cousin, Jalen.
- Estate tax check: Harper’s total estate is far below the federal exclusion, so there’s no federal estate tax. Pennsylvania doesn’t have a state estate tax either.
- Inheritance tax check: Pennsylvania does impose an inheritance tax, with rates that depend on the heir’s relationship. Cousins aren’t in the most favored class, so Jalen may owe state inheritance tax on what he receives. That’s estate tax versus inheritance tax in action: no estate tax due, but the heir may still have a bill.
Example #2: The Rodriguezes and the “portability” boost
Sofia and Mateo Rodriguez have a combined net worth of about $18 million. When Mateo passes, everything goes to Sofia.
- Estate tax check: Transfers to a surviving spouse are generally not subject to federal estate tax. But the couple is near the federal threshold when combined. Sofia can benefit from portability, which lets a surviving spouse add any unused portion of a deceased spouse’s federal exclusion to their own—if a timely Form 706 is filed. That portability election can effectively raise Sofia’s future protection well above $13.99 million.
- State layer: Depending on where Sofia lives, a state estate tax could still apply at a lower threshold. That’s yet another estate tax versus inheritance tax wrinkle to consider.
Thresholds, relationships, timing…
Three levers make estate tax versus inheritance tax planning unique:
- Thresholds. The federal exclusion is $13.99 million in 2025, but several states set lower estate-tax exemptions (some in the $1–7 million range), and those numbers can change.
- Relationships. In inheritance-tax states, spouses and close relatives are often taxed at lower rates—or exempt—while distant relatives or friends may pay more.
- Timing. Some rules phase in or phase out over time (Iowa’s repeal is a recent example). Laws evolve, which is why a periodic review keeps your estate tax versus inheritance tax understanding current.
How the Two Taxes Can Stack
It’s possible for an estate to face state estate tax while heirs also face inheritance tax. And while the federal estate tax only affects a small percentage of estates, state-level rules can change the math quickly. That’s the practical side of estate tax versus inheritance tax: the layers can stack.
Practical moves to consider (plain-English edition)
- Know your state. Start with whether your state has neither, one, or both taxes, then note the threshold and rates. This is the backbone of any estate tax versus inheritance tax plan.
- Use federal tools wisely. If you’re married and near the federal threshold, learn how portability works and note the deadline for filing Form 706 to preserve a deceased spouse’s unused exclusion.
- Mind beneficiary choices. In inheritance-tax states, who receives what can change the tax bill. Leaving assets to a sibling may be treated differently than leaving them to a child. That’s a quiet but powerful estate tax versus inheritance tax lever.
- Track sunsets. The larger federal exclusion is scheduled to shrink after 2025 under current law, but past IRS guidance says those who used the higher exclusion won’t be penalized later. Keeping an eye on this helps with the estate tax versus inheritance tax equation.
Example #3: Nia’s Two-State Tangle
Nia lives in Oregon but owns a rental home in New Jersey and leaves it to her nephew, Eli.
- Estate tax check: Oregon has a state estate tax with a relatively low threshold. Nia’s Oregon estate could face state estate tax even if her total is far below the federal exclusion.
- Inheritance tax check: New Jersey doesn’t have a state estate tax anymore, but it does have an inheritance tax that can apply to transfers to certain relatives like nephews. Eli might owe New Jersey inheritance tax on the property he receives—even though Nia lived elsewhere. That’s estate tax versus inheritance tax across state lines.
Estate Tax Versus Inheritance Tax
It boils down to who pays, when, and to whom the tax is owed. Estate tax is typically a federal (and sometimes state) levy on the estate before distributions. Inheritance tax, in a few states, is a bill for certain heirs after they receive property. Knowing which rules apply—to your state, your assets, and your beneficiaries—makes your plan clearer, simpler, and more resilient.