How Does Out of State Inheritance Tax Work?

An inheritance tax is a state-level tax paid by a person who receives money or property from the estate of a deceased individual. This is distinct from an estate tax, which is levied directly on the deceased’s estate before any assets are distributed. The federal government does not impose an inheritance tax, but a handful of states do. The complexity arises when the deceased person, beneficiary, and inherited property are in different states, as specific legal principles and the type of property determine which state can tax the inheritance.

Determining Which State Can Tax an Inheritance

Only a few states currently impose an inheritance tax. As of 2025, these states are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa officially eliminated its inheritance tax effective January 1, 2025. If a deceased person lived in or owned property in one of these states, their heirs may be subject to this tax, even if the heirs themselves live elsewhere.

A state’s right to tax an inheritance is governed by two legal concepts: domicile and situs. Domicile refers to the state where the deceased person had their permanent legal residence. This is established by factors like voter registration, driver’s license issuance, and where they filed state income taxes.

Situs, a Latin term meaning “position” or “site,” grants a state the right to tax property physically located within its borders. This rule applies to tangible assets like real estate. Therefore, even if a person lived and died in a state without an inheritance tax, any property they owned in one of the inheritance tax states can be taxed by that state.

Taxability Based on Property Type

Real Property

Real property, which includes assets like a home, vacation property, or land, is taxed by the state where it is physically located. For instance, imagine a person was a legal resident of Florida, a state with no inheritance tax. If this person owned a vacation home in Pennsylvania, Pennsylvania has the right to tax the value of that property. The beneficiary, even if they live in California, will be required to file a Pennsylvania inheritance tax return and pay tax on the home’s fair market value.

Tangible Personal Property

Tangible personal property refers to any physical item that can be moved, such as vehicles, artwork, jewelry, or furniture. These items are taxed based on their situs, or physical location at the time of the owner’s death. If the Florida resident from the previous example also owned a valuable art collection permanently displayed in their Pennsylvania vacation home, Pennsylvania could levy its inheritance tax on the art’s value. The same would apply to a classic car stored in New Jersey.

Intangible Personal Property

Intangible personal property consists of assets that do not have a physical form, such as cash, stocks, bonds, and retirement accounts like 401(k)s and IRAs. For these assets, the taxing jurisdiction is determined by the decedent’s state of domicile, not the location of the bank or brokerage firm. If our Florida decedent held a large stock portfolio and left it to a nephew in Nebraska, no state-level inheritance tax would be due because Florida was the domicile. However, if the decedent had been domiciled in New Jersey, that state would have the right to tax the transfer of the entire portfolio.

Calculating and Paying the Inheritance Tax

To calculate the tax owed, a beneficiary must first ascertain the fair market value of the inherited property as of the date of the decedent’s death. This may require formal appraisals for assets like real estate or valuable collectibles.

States with an inheritance tax use a system of beneficiary classes to set exemptions and tax rates, which vary based on the family relationship. A surviving spouse is almost universally exempt. Direct descendants, like children and grandchildren, receive large exemptions and the lowest tax rates. Other relatives, such as siblings, face smaller exemptions and higher rates, while distant relatives and unrelated beneficiaries are subject to the highest rates, which can reach 16% or more. For example, in Nebraska, an adult child’s inheritance is exempt up to $100,000, while in Kentucky, a niece’s inheritance is only exempt up to $1,000.

The legal responsibility for filing the return and paying the tax falls on the beneficiary, not the estate’s executor. The beneficiary must obtain the correct inheritance tax return form from the state levying the tax. The completed return and full tax payment must be submitted by the state’s deadline, which is a set number of months after the date of death.