The federal estate tax rate is 40 percent, but it only applies to estates larger than $13.61 million (in 2024)
The federal estate tax is a tax on the total value of a person's property, money, and possessions when they die. The IRS taxes the amount that exceeds a threshold called the exemption. In 2024, that exemption is $13.61 million per person. Anything below that threshold passes to heirs tax-free. Anything above it is taxed at a flat rate of 40 percent.
This means most people never pay federal estate tax. You would need to own more than $13.61 million in total assets—a house, investments, bank accounts, life insurance, everything combined—for this tax to explore to your estate. Married couples can combine their exemptions, raising the threshold to $27.22 million in 2024.
The exemption amount changes every year based on inflation. It was lower in previous years and will be different in future years. Some states also have their own estate taxes with lower thresholds and different rates, so a person might owe state estate tax even if they owe nothing to the federal government.
Key Takeaways
- The federal estate tax rate is 40 percent, but only on the portion of an estate that exceeds $13.61 million per person in 2024.
- The exemption threshold changes each year with inflation, and it is scheduled to drop significantly after 2025 unless Congress changes the law.
- Married couples can combine exemptions to shield up to $27.22 million from federal estate tax in 2024.
- Some states impose their own estate taxes with lower thresholds and different rates, independent of the federal tax.
- Most estates owe no federal estate tax because they fall below the exemption amount.
How the 40 percent rate actually works on large estates
The 40 percent rate applies only to the amount above the exemption, not to the entire estate. If someone dies with a $15 million estate in 2024, the first $13.61 million is exempt. The remaining $1.39 million is taxed at 40 percent, which equals $556,000 in federal estate tax owed.
The estate itself pays this tax before money is distributed to heirs. The executor—the person named to handle the estate—files a federal estate tax return (Form 706) with the IRS if the estate exceeds the exemption. The return is due nine months after the person's death, though an extension can be requested.
This is different from income tax on inherited money. Heirs do not pay income tax on what they inherit, whether the estate was large or small. The estate tax is paid once, by the estate, before distribution.
Why the exemption amount changes every year
Congress sets the exemption amount, and it is adjusted annually for inflation. The current $13.61 million figure (2024) is higher than it was in 2017, when it was $5.49 million. The increase happened because of the Tax Cuts and Jobs Act of 2017, which temporarily raised the exemption.
This temporary increase is set to expire on December 31, 2025. After that date, unless Congress passes new legislation, the exemption is scheduled to drop to approximately $7 million per person (adjusted for inflation at that time). This means far more estates would owe federal tax starting in 2026.
Because the exemption is temporary and will change, people with large estates sometimes work with tax professionals to plan ahead. Strategies like trusts, gifts made during lifetime, or charitable donations can reduce the taxable value of an estate, but these are complex decisions that depend on individual circumstances.
State estate taxes and inheritance taxes are separate
Seventeen states and the District of Columbia have their own estate taxes. These operate independently of the federal tax and often have lower exemption thresholds. For example, some states tax estates above $1 million or $2 million, much lower than the federal $13.61 million threshold.
A few states also have inheritance taxes, which are different from estate taxes. An inheritance tax is paid by the person who receives the money, not by the estate. The rate and exemptions vary by state and sometimes by the relationship between the deceased and the heir—spouses and children often pay lower rates or no tax at all.
If someone dies owning property in multiple states, the estate may owe tax in each of those states. This is another reason people with significant assets sometimes consult a tax professional or estate attorney.
Who actually pays estate tax and when
The executor of the estate is responsible for calculating and paying the tax. They use Form 706 to report the total value of everything the person owned at death—real estate, bank accounts, investments, vehicles, life insurance proceeds, retirement accounts, and personal property. The IRS values the estate as of the date of death.
The executor must file the return and pay any tax owed within nine months. If the estate does not have enough liquid cash to pay the tax, the executor may need to sell assets or borrow money. This is one reason why people with large estates sometimes keep life insurance or maintain accessible savings—to cover potential taxes without forcing the sale of a family home or business.
If the estate misses the important date or underpays, the IRS charges interest and penalties. The executor can request a six-month extension to file, but taxes are still due within nine months unless an extension is granted.
Planning strategies for estates above the exemption
People whose estates are likely to exceed the exemption sometimes work with an estate attorney or tax professional to reduce the taxable value. Common strategies include setting up trusts, making gifts to family members during their lifetime (which use a separate lifetime gift tax exemption), or donating to charity.
A revocable living trust does not reduce estate taxes, but it can help avoid probate and keep the estate private. An irrevocable trust can remove assets from the taxable estate, but the person giving the assets loses control of them. A charitable remainder trust allows someone to donate to charity while receiving income during their lifetime.
These strategies are complex and depend on the person's goals, family situation, and the size of their estate. They are also only worth considering if the estate is likely to exceed the exemption threshold. For most people, no planning is necessary.
What happens to the exemption after 2025
The current high exemption amount expires at the end of 2025. Starting January 1, 2026, the exemption is scheduled to drop to roughly half its current level, adjusted for inflation. This means an estate that owes no tax in 2024 could owe significant federal tax in 2026 if nothing changes.
Congress could pass legislation to extend the higher exemption, lower it further, or change the tax rate itself. The outcome depends on future legislative action, which is uncertain. People with large estates sometimes accelerate their planning before the exemption drops, but this is a decision to make with a tax professional who understands the specific situation.
Even if the exemption drops, most estates will still fall below the threshold and owe no federal estate tax. The impact will be greatest on people with estates between $7 million and $13.61 million.
Frequently Asked Questions
Do I have to pay estate tax if I inherit money?
No. Heirs do not pay income tax or estate tax on inherited money. The estate itself pays the estate tax before distribution, if the estate is large enough to owe it. You receive your inheritance without owing tax on it.
What counts toward the estate for tax purposes?
Everything the person owned at death counts: real estate, bank accounts, stocks, bonds, retirement accounts, life insurance proceeds, vehicles, jewelry, and business interests. Even property held in joint ownership or payable-on-death accounts are included in the taxable estate.
Can a married couple each use the full exemption?
Yes. Each spouse has their own $13.61 million exemption in 2024. A married couple can shield up to $27.22 million combined. The surviving spouse can also claim the unused exemption of the deceased spouse through a process called portability, if the executor files the right paperwork.
What if my state has an estate tax but the federal exemption protects me?
You could still owe state estate tax. State thresholds are often much lower than the federal exemption. For example, if you live in a state with a $2 million estate tax exemption and your estate is worth $5 million, you owe state tax even though you owe no federal tax.
Is there a way to reduce my estate before I die?
Yes. Gifts to family members, donations to charity, and certain trusts can reduce the taxable value of an estate. You also have a lifetime gift tax exemption separate from your estate tax exemption. A tax professional or estate attorney can explain which strategies fit your situation.