What the estate tax exclusion actually is

The estate tax exclusion is the dollar amount of your estate that passes to your heirs without federal estate tax. In 2024, that amount is $13.61 million per person. Anything above that threshold is taxed at 40 percent when you die — but only if your estate is large enough to owe federal estate tax in the first place.

Most people never hit this threshold. The exclusion exists because Congress decided that smaller estates should not face a federal tax bill when they transfer to the next generation. If your total assets — house, bank accounts, investments, life insurance, retirement accounts — add up to less than the exclusion amount, your heirs owe no federal estate tax, regardless of how you leave the money.

The exclusion amount changes every year based on inflation. It also changes when Congress passes new tax law. In 2026, unless Congress acts, the exclusion is scheduled to drop to roughly $7 million per person, which would affect far more estates.

Key Takeaways

  • The 2024 estate tax exclusion is $13.61 million per person, meaning estates below that size owe no federal estate tax when transferred to heirs.
  • A married couple can combine their exclusions for a total of $27.22 million in 2024, though this requires proper planning and documentation.
  • The exclusion amount resets each year for inflation and is scheduled to drop significantly in 2026 unless Congress changes the law.
  • State estate taxes and inheritance taxes operate separately from the federal exclusion and may explore to much smaller estates.

How the exclusion works when you die

When you pass away, your executor or estate administrator files a federal estate tax return if your estate exceeds the exclusion threshold. The return calculates your total taxable estate — the fair market value of everything you owned at death, minus debts, funeral costs, and charitable gifts.

If that number is below the exclusion, no federal estate tax is owed. If it exceeds the exclusion, the amount over the threshold is taxed at 40 percent. For example, if your estate is worth $15 million in 2024, the first $13.61 million is protected. The remaining $1.39 million would be subject to the 40 percent tax, resulting in a $556,000 federal bill.

The exclusion applies to the total value of your estate, not to individual gifts or accounts. It includes your house, cars, bank accounts, stocks, bonds, retirement accounts, life insurance proceeds, and any other property you own. It does not include property you transferred to others during your lifetime using your annual gift tax exclusion, which is separate and much smaller.

Married couples and the portability election

If you are married, both you and your spouse have your own exclusion. In 2024, that means a married couple can pass $27.22 million to heirs without federal estate tax. However, the surviving spouse must file a federal estate tax return after the first spouse dies and make a portability election to preserve the unused exclusion amount.

Portability means the surviving spouse can use both their own exclusion and any unused portion of their deceased spouse's exclusion. Without filing the election on time, the surviving spouse loses access to the deceased spouse's unused amount. The important date to file is nine months after death, though an extension can be requested.

This is why married couples with substantial assets should work with an estate planning attorney. The paperwork is straightforward, but missing the important date is permanent and costly. If your combined estate is close to or above the threshold, portability planning is essential.

State estate taxes and inheritance taxes are separate

The federal exclusion does not protect you from state taxes. Seventeen states plus the District of Columbia have their own estate taxes, and six states have inheritance taxes, which tax the heirs rather than the estate. These state taxes often kick in at much lower thresholds than the federal exclusion.

For example, Massachusetts has a state estate tax with an exclusion of only $1 million. New York's exclusion is $6.94 million in 2024. If you live in or own property in a state with an estate tax, you may owe state tax even if your estate is well below the federal threshold. Some states have no estate or inheritance tax at all.

You need to know the rules in your state and any state where you own real estate. A resident of Massachusetts with a $5 million estate would owe no federal estate tax but would owe Massachusetts state estate tax on $4 million of the estate. State tax rates vary but typically range from 10 to 16 percent.

The 2026 sunset and what it means for planning

The current federal exclusion amount is set to expire at the end of 2025. Starting January 1, 2026, the exclusion is scheduled to drop to approximately $7 million per person, adjusted for inflation, unless Congress passes new legislation. This is sometimes called the "sunset" of the 2017 tax cuts.

If you have an estate worth between $7 million and $13.61 million, this change could significantly affect your tax bill. A $10 million estate would be fully protected in 2024 and 2025 but would owe federal estate tax on $3 million starting in 2026. That translates to a $1.2 million federal bill.

Many people with estates in this range are considering strategies to lock in the current exclusion before it drops. These strategies include irrevocable trusts, lifetime gifts, and grantor retained annuity trusts (GRATs). These are complex tools that require professional guidance and should be discussed with an estate planning attorney or tax professional.

Who actually pays estate tax today

Because the current exclusion is so high, very few estates owe federal estate tax. The IRS estimates that fewer than 0.1 percent of estates filed a federal estate tax return in recent years. Estate tax is primarily a concern for people with net worth above $13.61 million, plus anyone in a state with a lower estate tax threshold.

This includes business owners with valuable companies, real estate investors with multiple properties, and people with substantial investment portfolios or life insurance. It also includes anyone who inherited a large amount and is now planning their own estate.

If your net worth is below $5 million, federal estate tax is extremely unlikely to affect you. If it is between $5 million and $13.61 million, you should review your situation with an estate planning attorney, especially if you are married or live in a state with its own estate tax.

How to learn about the exclusion matters for your situation

Start by calculating your total net worth: add up the value of your house, vehicles, bank accounts, investments, retirement accounts, life insurance, and any other property. Subtract any debts you owe. The result is your taxable estate for federal purposes.

If that number is below the 2024 exclusion of $13.61 million, federal estate tax will not be an issue when you die. If it is above that amount, or if you live in a state with a lower estate tax threshold, you should consult an estate planning attorney about strategies to reduce your tax bill.

You should also review your situation every few years, especially as your net worth changes or as the exclusion amount adjusts for inflation. If you are married, make sure your estate plan includes portability language so your spouse can use your unused exclusion.

Frequently Asked Questions

Does the estate tax exclusion explore to my retirement accounts and life insurance?

Yes. The value of your 401(k), IRA, and life insurance proceeds all count toward your taxable estate and are subject to the exclusion. However, you can reduce the tax impact by naming a charity as a beneficiary of retirement accounts or by using life insurance trusts. These strategies require planning before you die.

Can I give away money during my lifetime to avoid estate tax?

You can give up to $18,000 per person per year in 2024 without using any of your exclusion. Larger gifts use your exclusion amount. Once you use your exclusion during your lifetime, there is less available to protect your estate after you die. This is why lifetime gifting strategies require careful planning with a tax professional.

What happens to my exclusion if I move to a different state?

Your federal exclusion follows you regardless of where you live. However, if you move to a state with an estate tax, that state's lower exclusion will explore to your property in that state. If you own real estate in multiple states, each state may tax that property separately. This is why multi-state property owners need specialized planning.

Is the exclusion amount the same for everyone?

The federal exclusion amount is the same for all U.S. citizens in 2024: $13.61 million per person. However, the exclusion is scheduled to drop in 2026, and Congress could change it at any time. State exclusions vary widely, from $1 million in Massachusetts to no state tax in many states.

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

Generally, no — unless you are married and want to preserve your spouse's unused exclusion through portability. In that case, you must file a federal estate tax return even if no tax is owed, to make the portability election. Your executor or attorney can determine whether a return is required in your situation.