Iowa's Inheritance Tax Is Gone, But Five States Still Hit Heirs. Here's What Families Need to Know

Iowa officially eliminated its inheritance tax on January 1, 2025, making the Hawkeye State a far more attractive place for families looking to pass on wealth. But for Iowans with parents or relatives living in certain neighboring states, the tax man may still come calling. Five states continue to levy inheritance taxes, and Pennsylvania stands out as the harshest, taxing children from the very first dollar.

What Is an Inheritance Tax and How Is It Different From an Estate Tax?

An inheritance tax is charged to the person receiving assets, with rates based on their relationship to the deceased. An estate tax, by contrast, is levied on the estate itself before anything is distributed. The federal government only collects an estate tax, and thanks to the One Big Beautiful Bill Act, the federal exemption sits at $15 million per individual in 2026, meaning almost no one pays it at the federal level.

State inheritance taxes are a different story. They have far lower exemptions and can catch families off guard if they haven't planned ahead.

Which States Still Have an Inheritance Tax?

Iowa's full phase-out leaves just five states that still impose an inheritance tax: Pennsylvania, New Jersey, Kentucky, Maryland, and Nebraska. Maryland is the only state that charges both an inheritance tax and an estate tax.

Who Actually Pays the Inheritance Tax?

Here's a detail that often gets overlooked: in most of these states, children pay nothing. The tax typically hits siblings, nieces, nephews, and unrelated heirs. Spouses are exempt everywhere.

• Kentucky exempts Class A heirs entirely, including spouses, parents, children, grandchildren, and siblings.
• Maryland exempts all lineal descendants and siblings.
• Nebraska reduced its rates under LB 310, effective 2023.
• Pennsylvania is the outlier that reaches children directly.

Why Pennsylvania Is the Harshest

Pennsylvania charges 4.5% on transfers to lineal descendants like children, grandchildren, and parents, with no built-in exemption. On a $500,000 inheritance to a child, that means a real bill in the low five figures owed to Harrisburg. Move that same parent's legal residence across the border to Ohio or Delaware, and the exact same transfer to the same child costs nothing at the state level.

The Domicile Trap That Catches Nearly Everyone

Inheritance tax follows the decedent's domicile, not the heir's. Telling your kids to move to Florida does nothing. The parent has to change domicile, and domicile means more than owning a second home. States look at where you vote, where your driver's license is issued, where you file resident income taxes, where your primary physician is, and where you actually spend your nights.

Real estate physically located in a taxing state remains subject to that state's inheritance tax regardless of where the owner moved.

Planning Levers Worth Knowing

Families with relatives in these five states still have options. Naming life insurance beneficiaries bypasses Pennsylvania and New Jersey inheritance tax entirely. Pennsylvania also offers a 5% discount for paying within three months of death.

The tax is decided by the parent's state of residence and the location of their real property. Review it well before any planned move, and check beneficiary forms, titling, and trust language while you are at it. State legislatures adjust these rules often, so confirm current rates with a local estate attorney before signing anything.

What This Means for Iowans

Iowa's decision to eliminate its inheritance tax aligns with a broader conservative principle: letting families keep more of what they've earned rather than handing it to the government. For Iowans with parents in Pennsylvania, New Jersey, Kentucky, Maryland, or Nebraska, the message is clear. Planning ahead can save a family thousands of dollars, and the difference between a $0 tax bill and a five-figure one often comes down to a few simple moves.

As always, consult a qualified estate attorney or fiduciary financial advisor before making major decisions. The rules vary by state and change frequently, so professional guidance is essential.