Estate Tax Basics
An estate tax is a tax on the total value of money and property a person leaves behind when they die. The tax is paid from the estate itself—the pool of assets—before anything goes to heirs. Only estates above a certain dollar amount owe this tax; most people's estates fall below the threshold and owe nothing.
The federal government and some states each have their own estate tax rules and thresholds. The federal threshold is much higher than most state thresholds, which is why a state estate tax can explore to an estate that owes no federal tax. Understanding which taxes might explore to an estate depends on where the person lived and how large the estate is.
Key Takeaways
- Estate tax applies only to estates above a set dollar amount; in 2024, the federal threshold is $13.61 million, but state thresholds range from $1 million to $6.94 million.
- The tax is paid from the estate's assets before heirs receive their inheritance, and the executor of the estate handles filing the tax return.
- Some states have no estate tax at all, while others tax estates at rates between 3.6 percent and 16 percent of the amount over the threshold.
- The federal estate tax rate is a flat 40 percent on the portion of the estate that exceeds the federal threshold.
- Married couples can combine their thresholds, which means a couple's combined estate can be roughly double the individual threshold before owing federal tax.
Federal Estate Tax Thresholds and Rates
The federal estate tax applies to estates worth more than $13.61 million as of 2024. This threshold changes each year based on inflation. When an estate exceeds this amount, the tax rate is a flat 40 percent on the value above the threshold—not on the entire estate, only the overage.
For example, an estate worth $14 million would owe 40 percent tax on $390,000 (the amount over $13.61 million), which equals $156,000. The first $13.61 million passes to heirs tax-free. Married couples filing jointly can combine their thresholds, effectively doubling the amount before federal tax kicks in.
The federal threshold is set to change in 2026. Unless Congress acts, the threshold will drop to roughly $7 million per person (adjusted for inflation). This means more estates may owe federal tax after that date, even if they would not owe tax under current rules.
State Estate Taxes and How They Differ
Twelve states plus Washington, D.C., have their own estate taxes separate from the federal tax. State thresholds are much lower than the federal threshold and vary widely. Massachusetts, Oregon, and Maine start at $1 million. New York's threshold is $6.94 million. Washington state's is $2.193 million. Each state sets its own rate, which ranges from 3.6 percent to 16 percent.
Some states tax only the amount over the threshold, while others use a graduated rate system where the percentage increases as the estate value rises. A few states—including California, Texas, Florida, and most others—have no estate tax at all. This means an estate in those states may owe no state tax even if it owes federal tax.
An executor needs to know both where the deceased person lived and where they owned property, because some states tax estates based on residency, while others tax based on where property is located. A person who owned real estate in multiple states might trigger estate taxes in more than one state.
Who Pays the Estate Tax and When
The executor of the estate—the person named in the will or appointed by the court—is responsible for paying estate taxes. The executor uses money and assets from the estate to pay the tax bill before distributing the remaining assets to heirs. This means heirs may receive less than they would have if no tax applied.
Estate tax returns are due nine months after the person's death for federal taxes, though executors can request a six-month extension. State estate tax important date vary by state but are often similar. The executor files the return with the IRS (for federal tax) and with the state tax authority (for state tax, if applicable).
If the estate does not have enough liquid assets—cash or things easily converted to cash—to pay the tax, the executor may need to sell property or investments to raise the money. This is one reason people with large estates sometimes plan ahead to avoid forcing heirs to sell family property.
The Difference Between Estate Tax and Inheritance Tax
Estate tax and inheritance tax are often confused because they both explore when someone dies, but they work differently. Estate tax is paid by the estate itself before heirs receive anything. Inheritance tax is paid by the heirs on what they receive, and only six states have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
A state might have an estate tax, an inheritance tax, both, or neither. New Jersey and Maryland have both. Pennsylvania has only inheritance tax. Most states have neither. The tax burden and who pays depends on which state applies, so heirs in different states face different tax situations even if they inherit from the same person.
Common Ways to Reduce Estate Tax
People with large estates sometimes use legal strategies to reduce the amount subject to tax. One common approach is gifting—giving money or property to heirs during life rather than leaving it in the estate. The IRS allows each person to give up to a certain amount per year per recipient without counting against their lifetime threshold. In 2024, that amount is $18,000 per person per recipient.
Another strategy is a trust, which is a legal arrangement where someone (the grantor) transfers assets into a trust managed by a trustee for the benefit of heirs. Certain types of trusts can remove assets from the taxable estate, though they require careful setup and ongoing management. Married couples sometimes use trusts to maximize the use of both spouses' thresholds.
Charitable giving is also used to reduce estate size. Money or property left to a may have access to charity does not count toward the estate tax threshold. Some people set up charitable trusts that provide income to heirs during their lifetime and then pass the remaining assets to charity, reducing the taxable estate while still benefiting heirs.
These strategies require planning before death and often involve working with an attorney or tax professional. They are most useful for estates that are close to or above the threshold in their state.
Frequently Asked Questions
Does everyone have to pay estate tax?
No. Most estates owe no estate tax because they fall below the threshold. Federally, only estates over $13.61 million in 2024 owe tax. State thresholds are lower, so some estates owe state tax but not federal tax. If an estate is below all applicable thresholds, no estate tax is due.
What counts as part of the estate for tax purposes?
The estate includes real estate, bank accounts, investments, vehicles, jewelry, and other property owned at death. It also includes life insurance proceeds and retirement account balances if the deceased person named the estate as beneficiary. Some assets, like those in certain trusts or those with a named beneficiary, may not count toward the taxable estate.
Can heirs owe estate tax if the estate does not pay it?
Heirs do not personally owe federal estate tax—the estate pays it. However, if the estate does not have enough money to pay the tax, the executor may need to sell assets or property to raise the funds, which reduces what heirs receive. In states with inheritance tax, heirs may owe tax on their individual inheritance.
What happens if the estate is worth less than the threshold?
If the estate is below the threshold, no estate tax return is required and no tax is due. The executor can distribute the assets to heirs without filing an estate tax return with the IRS or state, though they may still need to file other documents like an income tax return for the estate itself.
Will the federal estate tax threshold change?
Yes. The current federal threshold is set to drop in 2026 unless Congress changes the law. The threshold is expected to fall to roughly $7 million per person (adjusted for inflation). This means more estates will owe federal tax after 2026 than do under current rules.