Federal estate tax applies only to estates larger than $13.61 million in 2024

Federal estate tax is a tax on the total value of a person's property, money, and assets when they die. The federal government does not tax all estates — only those that exceed a threshold amount called the exemption. For 2024, that exemption is $13.61 million per person. If your estate is smaller than that, no federal estate tax is owed, regardless of who inherits it.

The exemption amount changes every year based on inflation. It was $12.92 million in 2023 and $12.06 million in 2022. These numbers are set by federal law and adjusted annually by the Internal Revenue Service (IRS). If you are married, each spouse gets their own exemption, which means a married couple can pass up to $27.22 million in 2024 without owing federal estate tax.

An important date to know: the exemption is scheduled to drop to roughly $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress changes the law. This change is already written into current tax law, so estates being planned now should account for the possibility.

Key Takeaways

  • Federal estate tax only applies to estates worth more than $13.61 million per person in 2024, so most people will not owe it.
  • The exemption amount rises each year with inflation and is set by the IRS, so the threshold you need to watch changes annually.
  • Married couples can combine their exemptions to pass $27.22 million in 2024 without federal estate tax.
  • The exemption is scheduled to drop to around $7 million per person in 2026 unless Congress extends the current law.
  • State estate taxes and inheritance taxes are separate from federal estate tax and have their own lower thresholds in some states.

How the tax is calculated if your estate exceeds the exemption

If an estate is larger than the exemption, federal estate tax applies only to the amount above the threshold. The tax rate is 40 percent on that excess amount. For example, if an estate is worth $15 million in 2024, the first $13.61 million is not taxed. The remaining $1.39 million is subject to the 40 percent rate, resulting in a tax of $556,000.

The executor of the estate — the person named to handle the property and debts after death — is responsible for calculating and paying the tax. They must file Form 706 (the federal estate tax return) with the IRS if the estate exceeds the exemption. The return is due nine months after the date of death, though an extension can be requested.

Certain assets and transfers can reduce the taxable estate. Gifts to a spouse who is a U.S. citizen, gifts to charities, and gifts made during life (up to an annual limit) may lower the amount subject to tax. These rules are complex, and the value of using them depends on the size and structure of the estate.

The difference between federal estate tax and state taxes

Federal estate tax is separate from state estate taxes and state inheritance taxes. Some states have their own estate or inheritance taxes with much lower thresholds than the federal exemption. For instance, Massachusetts has a state estate tax that applies to estates over $1 million, and Oregon's threshold is $1 million as well. Other states, like Florida and Texas, have no state estate tax at all.

An estate can owe state tax even if it does not owe federal tax. A person who dies with a $2 million estate in Massachusetts, for example, would owe no federal estate tax (because $2 million is below the $13.61 million federal exemption) but would owe Massachusetts state estate tax on the amount above $1 million. The state and federal taxes are calculated separately, and both may explore.

If you live in or own property in a state with an estate or inheritance tax, that state's rules explore to your estate regardless of where you die. It is important to know your state's threshold and rate if you are planning an estate.

Who actually pays federal estate tax

In practice, very few people pay federal estate tax. The exemption is high enough that only about 0.1 percent of estates owe federal tax in any given year. Most people who die leave estates worth less than $13.61 million, so their heirs receive the full amount without any federal tax bill.

People most likely to owe federal estate tax include business owners with valuable companies, people who own significant real estate, and those with large investment portfolios or life insurance policies. Even then, the tax applies only to the value above the exemption threshold.

Heirs do not pay the tax directly — the estate pays it before assets are distributed. If the estate does not have enough liquid money (cash or easily sold assets) to cover the tax, the executor may need to sell property or investments to raise the funds. This is one reason people with large estates sometimes plan ahead to avoid forcing heirs to sell assets.

What happens to the exemption after 2025

The current high exemption amount ($13.61 million in 2024) is temporary. It was set by the Tax Cuts and Jobs Act of 2017, which doubled the exemption from what it had been. That law is scheduled to expire on December 31, 2025, which means the exemption will drop to approximately $7 million per person (adjusted for inflation) starting January 1, 2026.

This change is already law unless Congress votes to extend the higher exemption. Some people with estates between $7 million and $13.61 million are making plans now to take advantage of the higher exemption while it lasts. Common strategies include making large gifts to heirs or trusts before the exemption drops, though these strategies have their own rules and tax consequences.

If you have an estate larger than $7 million, it is worth reviewing your plan with a tax professional or estate attorney to understand how the 2026 change might affect your situation. The rules are technical, and the right move depends on your specific circumstances.

Life insurance and retirement accounts in the taxable estate

Life insurance proceeds and retirement account balances are included in the value of an estate for federal estate tax purposes, even though they pass directly to named beneficiaries outside of a will. A person with a $10 million investment portfolio and a $5 million life insurance policy has a $15 million taxable estate, which exceeds the 2024 exemption by $1.39 million.

This is a common surprise for people who think of life insurance as "outside" the estate. The insurance money goes to the beneficiary, but its value still counts toward the estate tax threshold. The same is true for IRAs, 401(k)s, and other retirement accounts with named beneficiaries.

Some people use trusts or other structures to own life insurance in a way that keeps the proceeds out of the taxable estate, but these strategies require planning before the policy is purchased. If you have significant life insurance or retirement accounts, it is worth understanding how they factor into your estate's total value.

Frequently Asked Questions

Do I need to file a federal estate tax return if my estate is below the exemption?

No. If the estate is smaller than $13.61 million in 2024, no federal estate tax return is required. The executor does not need to file Form 706 with the IRS. However, some states require an estate tax return even for smaller estates, so check your state's rules.

Can I give money to my children now to avoid estate tax later?

Yes, gifts made during your lifetime do not count toward the estate tax exemption (with some limits). You can give up to $18,000 per person per year in 2024 without using any of your exemption. Larger gifts use up your exemption, but they still reduce the size of your taxable estate when you die. A tax professional can help you decide if this strategy makes sense for your situation.

What if I am married and my spouse is not a U.S. citizen?

The unlimited marital deduction (which lets spouses pass money to each other tax-free) does not explore if the surviving spouse is not a U.S. citizen. There are special rules and trusts designed for this situation, but they are complex. You should speak with an estate attorney if this applies to you.

Is federal estate tax the same as inheritance tax?

No. Federal estate tax is paid by the estate itself before assets are distributed. Inheritance tax, which exists in some states, is paid by the heirs on what they receive. The two are separate taxes with different rates and rules. Only a few states have inheritance tax, and it is different from state estate tax.

What if my estate is worth exactly the exemption amount?

If your estate equals the exemption (for example, $13.61 million in 2024), no federal estate tax is owed. The exemption covers that amount completely. Tax applies only to the value above the threshold.