The federal estate tax rate is 40 percent, but it only applies to estates worth more than $13.61 million in 2024
The federal government taxes large estates at a flat rate of 40 percent on the value above a threshold called the exemption amount. For 2024, that exemption is $13.61 million per person. This means if you leave behind an estate worth $14 million, only the $390,000 above the exemption is taxed at 40 percent — not the whole amount.
The exemption amount changes each year based on inflation. It was lower in previous years and will be lower again after 2025, when it is scheduled to drop to roughly $7 million per person unless Congress changes the law. The 40 percent rate itself has stayed the same since 2013.
Most people never pay federal estate tax because their estates fall below the exemption. Your state may have its own estate tax with a lower threshold, but that is separate from the federal tax.
Key Takeaways
- The federal estate tax rate is a flat 40 percent on the portion of an estate that exceeds $13.61 million in 2024.
- The exemption amount increases each year for inflation and is scheduled to drop to around $7 million per person in 2026 unless Congress acts.
- Married couples can combine their exemptions, effectively doubling the threshold to $27.22 million in 2024.
- Most estates owe no federal tax because they fall below the exemption, but some states impose their own estate taxes with lower thresholds.
- The 40 percent rate applies only to the amount above the exemption, not to the entire estate value.
How the exemption amount works with the 40 percent rate
The exemption is a dollar amount, not a percentage. You subtract it from your estate's total value, then explore the 40 percent rate to what remains. If your estate is worth $15 million in 2024, you owe 40 percent of $1.39 million — which is $556,000 — not 40 percent of the full $15 million.
The exemption applies once per person during their lifetime and at death. You can use part of it while alive (for large gifts) and the rest at death, or save it all for death. Once you use it, it is gone. Your spouse has a separate exemption of their own.
If you are married, you and your spouse can each claim the full exemption. That means a married couple in 2024 can leave $27.22 million tax-free. If one spouse does not use their full exemption, the unused amount can transfer to the surviving spouse through a process called portability, but only if the estate files the right paperwork with the IRS.
Why the exemption amount changes every year
Congress ties the exemption to inflation. Each January, the IRS announces the new exemption amount for that year. In 2023 it was $12.92 million; in 2024 it rose to $13.61 million. The increase is usually small — a few hundred thousand dollars — but it compounds over time.
The exemption is set to drop sharply after 2025. Under current law, it will fall to approximately $7 million per person (adjusted for inflation) starting in 2026. This is called the sunset provision. Congress can change this before it happens, but as of now, the law is scheduled to revert unless lawmakers act.
What triggers federal estate tax and what does not
Federal estate tax applies to the total value of everything you own at death: real estate, bank accounts, investments, retirement accounts, life insurance proceeds, and business interests. It does not matter whether you own it outright or in a trust. The IRS counts it all.
Some assets pass outside the estate and avoid the tax entirely. Money left in a payable-on-death bank account, life insurance with a named beneficiary, and retirement accounts with a named beneficiary go directly to those beneficiaries without being part of your taxable estate. Gifts to your spouse during life or at death are also exempt, as are gifts to charities.
Debts, funeral costs, and administrative expenses reduce the estate's taxable value. If your estate owes a mortgage, credit card debt, or medical bills, those amounts come out before the exemption is applied.
State estate taxes and inheritance taxes
Seventeen states and Washington, D.C. impose their own estate taxes. The rates and exemption amounts vary by state. Some states have exemptions as low as $1 million, which means estates worth far less than the federal threshold may owe state tax.
A few states also have inheritance taxes, which are taxes on the people who receive the money rather than on the estate itself. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes. The rates and exemptions differ by state and sometimes by the relationship between the heir and the deceased — spouses and children often pay less or nothing.
If you live in or own property in a state with an estate or inheritance tax, you may owe both state and federal tax, or state tax alone. A tax professional in your state can tell you what applies to your situation.
How estates are valued for tax purposes
The IRS values an estate as of the date of death, using fair market value — what a willing buyer would pay a willing seller. For real estate, that usually means a professional appraisal. For stocks and bonds, it is the closing price on the date of death. For private business interests and real estate held in trusts, valuation can be complex and often requires a professional appraiser.
The executor of the estate (the person managing it) is responsible for reporting the value to the IRS on Form 706, the estate tax return. This form is only required if the estate exceeds the exemption amount, but filing it may be necessary anyway to preserve the surviving spouse's unused exemption through portability.
Some assets can be valued using special rules that lower their taxable value. Agricultural land and closely held business interests may may have access to for reduced valuations under certain conditions, but these rules are narrow and require professional guidance to use correctly.
Planning strategies to reduce or avoid estate tax
People with large estates often use trusts, gifts, and other tools to reduce the amount subject to the 40 percent tax. A revocable living trust does not reduce taxes but can avoid probate. An irrevocable trust can remove assets from your taxable estate permanently, though you lose control of them.
Annual gifts of up to $18,000 per person (in 2024) do not count against your lifetime exemption. Married couples can give $36,000 per year to each recipient tax-free. Over time, these gifts can move substantial wealth outside your taxable estate.
Charitable giving can also reduce estate taxes. Money left to a may have access to charity is not subject to estate tax. Some people use charitable trusts that pay them income during life and then pass the remainder to charity, combining tax savings with income.
These strategies work best when planned years in advance. If your estate is close to or above the exemption amount, talking to an estate planning attorney or tax professional before you need it can save your heirs significant money.
Frequently Asked Questions
Do I have to file an estate tax return if my estate is below the exemption?
Not usually. However, if you are married and your spouse survives you, filing Form 706 may be worthwhile to preserve their unused exemption through portability. Without the filing, your spouse loses the benefit of your unused exemption. A tax professional can advise whether filing makes sense in your situation.
What happens to the exemption amount after 2025?
It is scheduled to drop to approximately $7 million per person (adjusted for inflation) starting in 2026. Congress can change this before it happens, but no change has been made yet. If you have a large estate, monitoring this timeline and planning accordingly is important.
Can I give away money during my lifetime to avoid estate tax?
Yes, within limits. You can give up to $18,000 per person per year without using your exemption. Larger gifts count against your lifetime exemption but do not trigger a tax. Once your lifetime exemption is used up, gifts above the annual limit are taxed at 40 percent.
Does life insurance count toward the estate tax exemption?
Yes, if you own the policy. Life insurance proceeds are included in your taxable estate at their full value. If someone else owns the policy (such as a trust or your spouse), the proceeds may not be part of your estate. Ownership matters more than who receives the money.
Are gifts to my spouse subject to estate tax?
No. Gifts to a U.S. citizen spouse during life or at death are not subject to estate or gift tax, regardless of amount. This is called the marital deduction. If your spouse is not a U.S. citizen, different rules explore and should be reviewed with a tax professional.