IntroductionAn inheritance tax is a state tax that you pay when you receive money or property from the estate of a deceased person. Unlike the federal estate tax, the beneficiary of the property is responsible for paying the tax, not the estate. However, as of 2019, only six states impose an inheritance tax. And even if you live in one of those states, many beneficiaries are exempt from paying it.Comparison with estate taxThe key difference between estate and inheritance taxes lies in who is responsible for paying it.An estate tax is levied on the total value of a deceased person’s money and property and is paid out of the decedent’s assets before any distribution to beneficiaries.However, before an inheritance tax is due, the value of the assets must exceed certain thresholds that change each year, but generally it’s at least $1 million. Because of this threshold, only about 2% of taxpayers will ever encounter this tax.Get every deduction you deserve. With TurboTax, we’ll search over 350 tax deductions and credits so you get your maximum refund, guaranteed. It’s free to start, and enjoy $10 off TurboTax Deluxe when you file.How inheritance tax worksOnce the executor of the estate has divided up the assets and distributed them to the beneficiaries, the inheritance tax comes into play. The tax amount is calculated separately for each individual beneficiary, and the beneficiary must pay the tax.For example, a state may charge a 5% tax on all inheritances larger than $2 million.Therefore, if your friend leaves you $5 million in his will, you only pay tax on $3 million, which is $150,000.The state would require you to report this information on an inheritance tax form.States with an inheritance taxThe federal government does not have an inheritance tax. The six states that impose an inheritance tax are:IowaKentuckyMarylandNebraskaNew JerseyPennsylvaniaOf course, state laws are subject to change, so if you are receiving an inheritance, check with your state’s tax agency. The tax rates on inheritances can be as low as 1% or as high as 20% of the value of property and cash you inherit.Don’t worry about knowing tax rules, with TurboTax Live, you can connect with a real CPA or EA online from the comfort of your own home for unlimited tax advice and a line-by-line review, backed by a 100% accurate expert approved guarantee.Inheritance tax exemptionsDepending on your relationship to the decedent, you may receive an exemption or reduction in the amount of inheritance tax you must pay.Most states exempt a spouse from the tax when they inherit the property from another spouse.Children and other dependents may qualify for the same exemption, though in some cases, only a portion of the inherited property may qualify.Generally, the higher rates of tax will be paid by those who inherit property from a descendent with whom they have no familial relationship.