Estate tax is a federal tax on the total value of a person's property, investments, and assets when they die

The federal government taxes large estates, but most estates in the United States do not owe this tax. The reason is the federal estate tax exemption—a threshold amount below which no federal estate tax is due. For 2024, that threshold is $13.61 million per person. If your estate is worth less than that amount when you die, your heirs owe no federal estate tax, regardless of how the property is divided.

The tax applies only to the value above the exemption. If an estate is worth $15 million, only the $1.39 million above the exemption is taxed. The federal estate tax rate is a flat 40 percent on the taxable amount. This exemption amount changes each year based on inflation, and it is scheduled to drop to roughly $7 million per person in 2026 unless Congress changes the law.

Some states also impose their own estate taxes or inheritance taxes, which work differently and have lower thresholds. A few states tax estates worth as little as $1 million. If you live in or own property in a state with an estate tax, you may owe state tax even if you owe no federal tax.

Key Takeaways

  • Federal estate tax applies only to estates worth more than $13.61 million in 2024, and the tax rate is 40 percent on the amount above that threshold.
  • The federal exemption is scheduled to drop to approximately $7 million per person in 2026 unless Congress extends the current law.
  • Some states impose their own estate or inheritance taxes with much lower thresholds, ranging from $1 million to $6 million depending on the state.
  • Married couples can combine their exemptions, effectively doubling the threshold if the first spouse's exemption is preserved through proper planning.
  • An estate tax return must be filed with the IRS if the estate exceeds the exemption, even if no tax is ultimately owed.

How the federal exemption works for married couples

When you are married, both spouses have their own $13.61 million exemption. If one spouse dies and leaves everything to the surviving spouse, no federal estate tax is owed because of the unlimited marital deduction—spouses can leave any amount to each other tax-free. However, the surviving spouse then has only their own exemption when they die.

To preserve both exemptions, couples often use a strategy called portability. When the first spouse dies, the executor files an estate tax return (even if no tax is owed) and elects portability. This allows the surviving spouse to use the deceased spouse's unused exemption in addition to their own, effectively doubling the threshold to $27.22 million in 2024. Without this election, the first spouse's exemption is lost.

Portability requires filing the return and making the election within nine months of death (or within fifteen months if an extension is filed). If you do not file the return, you cannot claim portability later. This is why even small estates sometimes need a return filed—to preserve the exemption for the surviving spouse.

State estate and inheritance taxes

Twelve states and the District of Columbia impose their own estate taxes. The thresholds and rates vary widely. Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington all have estate taxes. Some states tax estates as small as $1 million; others start at $5 million or $6 million.

Six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—impose inheritance taxes instead of estate taxes. The difference matters: an estate tax is paid by the estate itself, while an inheritance tax is paid by the person who receives the property. Inheritance tax rates and exemptions depend on the relationship between the deceased and the heir. Spouses and children often pay nothing, while distant relatives or non-relatives may owe tax on what they inherit.

If you own property in a state other than where you live, you may owe tax in both states. Some states offer credits to avoid double taxation, but you should check the rules for any state where you own real estate or have significant assets.

What triggers the need to file an estate tax return

You must file a federal estate tax return (Form 706) with the IRS if the estate's gross value exceeds the exemption amount at the time of death. The "gross value" includes everything: real estate, bank accounts, investments, retirement accounts, life insurance proceeds, and the value of a business. It does not matter whether the estate actually owes tax; if the value exceeds the threshold, the return must be filed.

The important date is nine months after death. An executor can request a six-month extension, pushing the important date to fifteen months. Filing late can result in penalties and interest, and it prevents the surviving spouse from claiming portability if applicable.

Even if no tax is owed, filing the return serves an important purpose: it locks in the value of the estate's assets as of the date of death. This "stepped-up basis" allows heirs to inherit property at its market value on that date, which can save them significant capital gains tax if they sell the property later. Without the return, the IRS may challenge the valuation years later.

The scheduled change in 2026

The current $13.61 million exemption is set to expire on December 31, 2025. Starting January 1, 2026, the exemption will drop to approximately $7 million per person (adjusted for inflation) unless Congress passes new legislation to extend or change it. This is sometimes called the "sunset" of the Tax Cuts and Jobs Act of 2017.

If you have an estate that is likely to exceed $7 million but is currently below $13.61 million, you may want to discuss your situation with an estate planning attorney or tax professional. Some people use the higher exemption while it exists to transfer assets to heirs or trusts before the exemption drops. Others wait to see whether Congress changes the law. There is no single right answer; it depends on your specific circumstances and goals.

Congress could extend the current exemption, lower it further, or change the tax structure entirely. Tax law changes are unpredictable, so planning based on current rules is the most reliable approach.

How property value is determined for tax purposes

The IRS requires that property included in an estate be valued at its fair market value as of the date of death. For stocks and bonds, this is straightforward—it is the closing price on that date. For real estate, a professional appraisal is usually needed. For a business, valuation can be complex and may require a formal business valuation.

Some assets are harder to value. Art, jewelry, and collectibles require appraisals by may have access to experts. Retirement accounts like IRAs and 401(k)s are valued at their account balance. Life insurance proceeds are valued at the full amount paid to the estate. If the deceased owned a percentage of a business, the value of that stake must be determined, often using methods like the income approach or comparable sales.

The executor or a tax professional prepares a detailed list of all assets and their values for the estate tax return. If the IRS disagrees with a valuation, it can audit the return and propose a higher value, which would increase the tax owed. This is why accurate, well-documented valuations matter.

When to talk to an estate planning professional

If your estate is likely to exceed the current exemption—or if you are married and want to preserve both spouses' exemptions—you should consult an estate planning attorney. They can help you understand your situation and discuss strategies like trusts, gifts, and portability elections that may reduce or eliminate estate tax.

You should also seek professional help if you own property in multiple states, own a business, have significant life insurance, or have a blended family. These situations often involve tax considerations that go beyond a straightforward will.

If someone has already died and you are the executor, contact a tax professional or attorney before filing the estate tax return. They can may support the return is filed correctly and on time, and they can help you understand what documents you need to gather and what valuations are required.

Frequently Asked Questions

Does my estate owe federal estate tax if it is worth $10 million?

No. In 2024, the federal exemption is $13.61 million, so an estate worth $10 million owes no federal estate tax. However, you may still need to file a return if you want to preserve portability for a surviving spouse, or if you live in a state with a lower estate tax threshold.

What is the difference between estate tax and inheritance tax?

Estate tax is paid by the estate before assets are distributed to heirs. Inheritance tax is paid by the person who receives the property. Only six states have inheritance taxes; most states that tax estates use the estate tax model. The tax burden and rates differ between the two systems.

Can I reduce my estate tax by giving money to my children now?

Yes. You can give up to $18,000 per person per year (in 2024) without using any of your exemption. Larger gifts use your exemption but do not trigger a tax until you exceed the exemption amount. A tax professional can help you plan gifts strategically based on your goals and timeline.

What happens to the exemption if Congress does not act before 2026?

The exemption will automatically drop to approximately $7 million per person on January 1, 2026. Estates between $7 million and $13.61 million would then owe federal estate tax. Congress could extend the current exemption, but there is no may provide it will do so.

Do I need to file an estate tax return if no tax is owed?

You must file if the estate exceeds the exemption, even if no tax is owed. Filing preserves portability for a surviving spouse and locks in asset values for the stepped-up basis. Without the return, you lose these benefits and may face penalties if the IRS later determines the estate was large enough to require filing.