What the Federal Estate Tax Is

The federal estate tax is a 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 sum of everything the deceased owned—before the remaining assets go to heirs. It is separate from income tax and state taxes, and it only applies to estates above a certain dollar threshold.

Not every estate pays this tax. The threshold changes yearly and is set by federal law. In 2024, for example, estates under $13.61 million are not subject to federal estate tax. This means most people's estates never owe anything to the IRS on this basis. The tax applies only to the value above the threshold, and only if the estate is large enough to trigger it in the first place.

Key Takeaways

  • The federal estate tax applies only to estates valued above a threshold that changes each year; in 2024 that threshold is $13.61 million per person.
  • The tax is paid by the estate before heirs receive their inheritance, not by the heirs themselves.
  • Married couples can combine their thresholds, effectively doubling the amount that can pass tax-free.
  • The threshold is scheduled to drop significantly in 2026 unless Congress changes the law.
  • An estate attorney or tax professional can help determine whether an estate will owe tax and what steps might reduce it.

How the Threshold Works

The threshold is called the federal estate tax exemption. Each person gets one. If your estate is worth less than the exemption amount, no federal estate tax is owed, and your heirs inherit everything without the IRS taking a cut based on this tax.

If your estate exceeds the exemption, only the amount above it is taxed. The tax rate on that excess is 40 percent. For example, if the exemption is $13.61 million and your estate is worth $14 million, only $390,000 is subject to tax, which would be $156,000 owed by the estate.

The exemption amount is adjusted for inflation each year. It was lower in previous years and will change again in 2025. You can find the current year's exemption on the IRS website or by asking a tax professional.

The 2026 Sunset and What It Means

The current exemption amounts are temporary. They were set by a 2017 tax law that is scheduled to expire at the end of 2025. When that happens, the exemption will drop to approximately $7 million per person (adjusted for inflation), unless Congress passes new legislation to extend or change it.

This matters because estates that would not owe tax under the current $13.61 million threshold might owe tax under a $7 million threshold. People with large estates sometimes plan ahead for this change by working with an attorney to understand their potential tax liability under both scenarios.

Whether Congress will change this law before 2026 is unknown. Tax law changes require legislative action, and the outcome depends on future political decisions. If you have a substantial estate, a tax professional can help you understand how the current rules explore to you and what might change.

How Married Couples Are Treated

Married couples filing jointly can combine their exemptions. This is called portability. Instead of each spouse having a separate $13.61 million exemption (totaling $27.22 million), they can use one spouse's unused exemption if the other spouse dies first and the surviving spouse makes the right election on a tax form.

This means a married couple can pass nearly $27.22 million to their heirs without owing federal estate tax in 2024. The surviving spouse must file an estate tax return even if no tax is owed, in order to preserve the unused exemption for later use.

Unmarried partners do not get this benefit. Each person has only their own exemption, with no way to transfer unused amounts to a partner.

What Gets Counted in Your Estate

Your estate includes more than just a bank account or a house. It includes the current market value of real estate, vehicles, investments, retirement accounts, life insurance proceeds, business interests, and personal property like jewelry or art. It also includes certain gifts you made during your lifetime if they exceeded annual limits.

Some assets pass outside the estate and are not counted for this tax. These include assets with a named beneficiary (like a life insurance policy with a named beneficiary, or a payable-on-death bank account) and assets held in certain trusts. An attorney can explain which of your assets would be counted.

When You Might Need Professional Help

If your estate is close to or above the exemption threshold, or if you expect it to be above the lower threshold after 2026, talking to an estate attorney or tax professional is worthwhile. They can review your situation and explain whether federal estate tax is a concern for you.

An attorney can also discuss strategies that some people use to reduce their taxable estate, such as certain types of trusts or lifetime gifts. These strategies have specific rules and timing requirements, so they work only with professional guidance.

If you have a modest estate well below the threshold, you likely do not need to worry about federal estate tax, though you may still want a will or trust for other reasons.

State Estate and Inheritance Taxes

Some states also tax estates or inheritances. These are separate from the federal estate tax and have their own thresholds and rates. A few states have no estate or inheritance tax at all. Others tax estates above a much lower threshold than the federal government does.

If you live in or own property in a state with an estate tax, that tax may explore even if your estate is below the federal threshold. A tax professional in your state can tell you whether state tax is a concern for your situation.

Frequently Asked Questions

Do I have to pay federal estate tax if I leave money to my spouse?

No. Transfers to a surviving spouse are not subject to federal estate tax, regardless of the amount. This is called the marital deduction. However, the surviving spouse's own estate will include that inherited money, so it could be subject to tax when they die, unless they also leave it to a spouse or it is below the exemption at that time.

What if I give away money or property while I'm still alive?

Gifts during your lifetime can reduce your taxable estate, but they count against your lifetime exemption. 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, leaving less available when you die. A tax professional can explain how lifetime gifts affect your situation.

Does the federal estate tax explore to retirement accounts like IRAs or 401(k)s?

Yes. The value of retirement accounts is included in your estate for federal estate tax purposes. However, these accounts also have income tax consequences for heirs, which can be significant. An attorney or tax professional can explain the combined tax impact on your beneficiaries.

What happens if my estate owes federal estate tax?

The executor or personal representative of the estate must file a federal estate tax return and pay the tax owed from estate assets before distributing money to heirs. The IRS provides forms and instructions on its website, but most estates that owe tax work with a tax professional or attorney to handle the filing and payment.

Can I reduce my estate tax by donating to charity?

Yes. Charitable donations reduce the taxable value of your estate and may also provide an income tax deduction. You can donate during your lifetime or through your will. Certain types of charitable trusts also offer tax benefits. A tax professional or estate attorney can explain which approach works best for your goals.