Inheritance Tax Exemptions

An inheritance tax exemption is a deduction that reduces the taxable value of the inheritance. Just as you can claim deductions on your federal income tax return, you can claim deductions when you receive an inheritance.

In practice, when you claim an exemption on inheritance tax, you reduce how much inheritance tax you will pay. And while inheritance tax exemptions vary from state to state, they're based on the same principles.

Anna Nicole Smith
Win McNamee/Getty Images
In 2006, attorney Howard Stern guided Anna Nicole Smith through a legal case concerning Smith's deceased
husband's estate.


With estate tax, the estate gets only so many deductions, but with inheritance tax each heir can claim exemptions. So, continuing with our example, each of Mr. Smith's children can claim various exemptions. Ralph can claim exemptions. Terrance can claim exemptions.

The relationship of the heir to the decedent affects the exemptions the heir can claim. The most important relationship exemption is the one the decedent's surviving spouse can claim. Anything the decedent leaves to his surviving spouse is tax-exempt. So, if Mr. Smith left his wife his entire estate, Mrs. Smith would not have to pay a dime of inheritance tax (or estate tax, for that matter).

But if a state considers an heir a close family member of the decedent's, the heir may qualify for a family exemption. Pennsylvania, for example, has a $3,500 family exemption. Heirs outside Mr. Smith's family, such as Terrance, would not be able to claim this exemption.

The biggest exemption a non-spouse heir can claim on inheritance tax is the state's minimum tax threshold. If the value of the inheritance is less than a specified amount, the heir does not have to pay inheritance tax. In Tennessee, for example, if an heir's inheritance is less than $1 million, he or she does not have to pay inheritance tax.

Cheating Death
Crafty estate planners have figured out many ways to use estate and inheritance tax exemptions to reduce their clients' taxes. One popular route is to create trusts upon death, bequeath some money to charity, bequeath a chunk equal to the tax threshold to children and leave the rest to one's spouse. With recent increases in the tax thresholds for estate and inheritance taxes, heirs are able to avoid having to pay increasingly large amounts of money.


Money and assets, including real estate, left to a charity or other organization are subject to different tax rates. In some states, such as Pennsylvania, anything bequeathed to charity is tax-exempt.

In most states, heirs can deduct any insurance benefits they receive from the decedent's estate. For example, if Mr. Smith's life insurance policy pays out $250,000, and his children Timothy and Belinda are equal beneficiaries on the policy, Timothy and Belinda could each claim $125,000 of the estate tax free.

If the decedent already paid taxes on certain types of property, the heirs usually don't have to pay additional taxes.

So after the exemptions are accounted for, how much would you possibly have to pay? Read on to find out about the rates behind inheritance taxes.