# Estate Tax vs Inheritance Tax: Who Pays
Most people lump estate tax and inheritance tax together, but the distinction matters for your family's finances. These two taxes work differently, and understanding which one applies to your situation affects how much your heirs actually receive.
Estate tax applies to the total value of everything a deceased person owned. The federal government collects this tax before distributing assets to heirs. The IRS exempts estates worth less than $13.61 million in 2024, so most Americans avoid federal estate tax entirely. However, 12 states plus Washington D.C. impose their own estate taxes with much lower thresholds. In Massachusetts, for example, estates exceeding $1 million face state taxes starting at 0.8 percent and climbing to 16 percent.
Inheritance tax, by contrast, targets the heirs who receive the money. Six states levy this tax directly on beneficiaries. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all tax inheritances, though rates and exemptions vary widely. A surviving spouse typically pays nothing, but adult children and distant relatives face steeper bills. Iowa inheritance tax rates reach 15 percent for non-relatives. Pennsylvania charges 15 percent on inheritances to siblings but only 4.5 percent for spouses.
The practical difference: with estate tax, the estate pays before distribution shrinks what heirs get. With inheritance tax, individual heirs pay based on their relationship to the deceased and the amount received.
Residents of states with both taxes face compounded pressure. New Jersey charges both, meaning heirs pay twice on the same inheritance. Conversely, states like Florida, Texas, and Wyoming skip both taxes entirely, making them attractive for wealthy families planning their legacies.
Check your state's rules now rather than leaving this job to your executor. If you live in a high