The Estate Tax Explained
The estate tax is a federal tax on the total value of money and property a person leaves behind when they die. The IRS collects it from the estate itself—the collection of assets—before anything goes to heirs. It is separate from income tax or property tax; it applies only when someone passes away and only if their estate reaches a certain dollar threshold.
Not every estate pays this tax. The federal government sets an exemption amount each year, and only estates larger than that threshold owe federal estate tax. For 2024, that exemption is $13.61 million per person. This means most people's estates never trigger the tax at all. Some states also impose their own estate taxes with lower thresholds, so a large estate might owe state tax even if it avoids the federal one.
Key Takeaways
- The federal estate tax applies only to estates worth more than $13.61 million in 2024, so the vast majority of estates do not owe it.
- The tax is paid by the estate before heirs receive their inheritance, not by the heirs themselves after they inherit.
- Some states impose their own estate taxes with much lower thresholds, ranging from $1 million to $6 million depending on the state.
- The exemption amount changes each year and is scheduled to drop significantly in 2026 unless Congress acts.
- An executor or estate administrator must file a federal estate tax return if the estate exceeds the exemption, even if no tax is ultimately owed.
How the Federal Estate Tax Rate Works
If an estate does exceed the exemption threshold, the tax rate on the amount over that threshold is 40 percent. This is a flat rate—it does not increase based on how much larger the estate is. For example, if an estate is worth $14.61 million in 2024, only the $1 million above the exemption is taxed, and that $1 million is taxed at 40 percent, resulting in a $400,000 tax bill.
The exemption applies per person, so a married couple can combine their exemptions. In 2024, a married couple can shield up to $27.22 million from federal estate tax if they plan correctly. However, this requires proper legal documentation—the surviving spouse must file paperwork to preserve the unused exemption of the first spouse to die, or that exemption is lost.
State Estate Taxes and Inheritance Taxes
Seventeen states and the District of Columbia currently impose their own estate taxes. These state-level taxes have much lower thresholds than the federal exemption. Massachusetts, for instance, taxes estates over $1 million. Oregon taxes estates over $1 million. New York taxes estates over $6.94 million. The rates vary by state, typically ranging from 3.6 percent to 16 percent on the amount over the state threshold.
Some states also have inheritance taxes, which are different from estate taxes. An inheritance tax is paid by the person who receives the money or property, not by the estate. Six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—impose inheritance taxes. The rate and whether you owe depends on your relationship to the person who died; spouses and children often pay nothing or a lower rate, while more distant relatives or unrelated people pay more.
What Assets Are Included in the Estate
The estate includes nearly everything a person owned at death: real estate, bank accounts, investments, retirement accounts, life insurance proceeds, vehicles, jewelry, and business interests. It also includes the value of certain gifts made within three years of death in some cases. The only major assets that typically fall outside the estate are those with a named beneficiary, like a life insurance policy with a named beneficiary or a payable-on-death bank account.
The value of the estate is determined as of the date of death. This is called the "stepped-up basis," and it matters for taxes the heirs will owe later. If someone inherited stock worth $100 per share on the date of death and sells it a month later for $110 per share, they owe capital gains tax only on the $10 gain, not on the original $100. This step-up in basis can save heirs significant money in taxes.
The Exemption Amount Changes Each Year
Congress sets the federal exemption amount, and it is adjusted annually for inflation. In 2023, it was $12.92 million per person. In 2024, it rose to $13.61 million. These increases happen automatically unless Congress changes the law. However, the exemption is scheduled to drop dramatically in 2026—it is set to fall to roughly $7 million per person (adjusted for inflation) unless Congress votes to extend the current higher amount.
This scheduled drop is important for people with large estates. If someone's estate is worth $10 million today, it would be under the 2026 exemption threshold and would not owe federal estate tax. But if the exemption drops to $7 million, that same $10 million estate would suddenly owe 40 percent tax on the $3 million above the new threshold. People with substantial assets sometimes work with estate planning attorneys to make gifts or set up trusts before the exemption shrinks.
Who Files the Estate Tax Return
The executor or personal representative of the estate is responsible for filing the federal estate tax return, called Form 706, if the estate exceeds the exemption amount. This must be filed with the IRS within nine months of the person's death, though an extension can be requested. Even if the estate does not owe any tax because it is under the threshold, some estates still must file the return to preserve the surviving spouse's unused exemption.
Filing the return is complex and usually requires help from an accountant or estate attorney. The return must list every asset, its value on the date of death, and any debts or expenses. The IRS may audit the return and ask for documentation of how values were determined, especially for assets like private businesses or real estate that do not have a clear market price.
Common Misconceptions About Estate Tax
Many people believe the estate tax affects them when it does not. Because the exemption is so high, fewer than one in every thousand estates owe federal estate tax in any given year. If someone's net worth is under $10 million, federal estate tax is extremely unlikely to be a concern. However, state estate taxes can explore to much smaller estates, so someone in Massachusetts or Oregon with a $2 million estate should consider state tax planning.
Another misconception is that heirs owe the estate tax. They do not. The tax is paid by the estate before the heirs receive their inheritance. If an estate owes $400,000 in tax, that money comes out of the estate's assets, and heirs receive what is left. This is why the tax can sometimes force the sale of family property or a business—there may not be enough liquid cash to pay the tax without selling assets.
Frequently Asked Questions
Do I have to pay estate tax on an inheritance I receive?
No. The estate pays the tax before you inherit. However, if you live in a state with an inheritance tax and you are not a spouse or child, you may owe inheritance tax on what you receive. This is different from estate tax and is paid by you, not the estate.
What happens if the estate does not have enough cash to pay the tax?
The executor may need to sell assets—real estate, investments, or a business—to raise the cash. This is one reason large estates sometimes have to be liquidated. Some families take out loans against the estate to pay the tax while keeping assets intact, though this is expensive.
Can I reduce my estate tax by giving money away before I die?
Yes. 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 amount but do not trigger a tax during your lifetime. An estate planning attorney can explain strategies that fit your situation.
Does life insurance count toward the estate tax exemption?
Yes, life insurance proceeds are included in the estate's value for tax purposes. However, if the policy is owned by an irrevocable trust or another person rather than by you, the proceeds may fall outside your estate and avoid the tax entirely.
What is the difference between estate tax and inheritance tax?
Estate tax is paid by the estate before heirs receive anything. Inheritance tax is paid by the person who inherits, and the rate often depends on their relationship to the deceased. Only six states have inheritance tax, while seventeen have estate tax.