Federal Estate Tax Rates and the Current Exemption

Federal estate tax is a tax on the total value of a person's property when they die. The rate is 40 percent, but only on the amount above a threshold called the exemption. For 2024, that exemption is $13.61 million per person. This means if your estate is worth $13.61 million or less, no federal estate tax is owed at all.

The exemption amount changes every year based on inflation. It was $12.92 million in 2023 and will be different in 2025. The exemption is also set to drop significantly after 2025 — currently scheduled to fall to around $7 million per person (adjusted for inflation) unless Congress changes the law. This scheduled change matters if you are planning for an estate worth more than $7 million.

The 40 percent rate applies only to the portion of the estate above the exemption. If your estate is worth $14 million and the exemption is $13.61 million, only the remaining $390,000 is taxed, resulting in a tax of $156,000.

Key Takeaways

  • Federal estate tax is 40 percent, but only on the value above $13.61 million per person in 2024, and that threshold changes yearly.
  • Most estates owe no federal estate tax because the exemption is high and most people's property is worth less than the threshold.
  • The exemption is scheduled to drop to around $7 million per person after 2025 unless Congress passes new legislation.
  • State estate taxes and inheritance taxes exist in some states and have lower thresholds, so you may owe state tax even if federal tax does not apply.
  • The tax is paid by the estate itself before money is distributed to heirs, not by the heirs on what they receive.

How the Tax Is Calculated and Paid

Estate tax is calculated on the total value of everything the deceased owned at the time of death — real estate, bank accounts, investments, retirement accounts, life insurance, and personal property. Debts, funeral costs, and administrative expenses are subtracted first, then the exemption is applied to what remains.

The estate's executor or administrator files a federal estate tax return (Form 706) with the IRS if the estate is large enough to require one. The estate itself pays the tax from its assets before the remaining money and property go to heirs. This means heirs may receive less than they would have if the tax had not been owed.

The deadline to file the return and pay the tax is nine months after the person's death, though an extension can be requested. If the tax is not paid on time, interest and penalties accrue.

State Estate and Inheritance Taxes

Seventeen states and Washington, D.C., have their own estate taxes or inheritance taxes. These are separate from federal estate tax and often have much lower thresholds. For example, some states tax estates worth $1 million or more, while others start at $5.7 million. A few states tax what heirs receive rather than the estate itself — this is called an inheritance tax.

State tax rates vary widely, typically ranging from 5 to 20 percent depending on the state and the size of the estate. A person living in a state with an estate tax may owe state tax even if their estate is below the federal exemption and owes no federal tax.

The states with estate taxes are Connecticut, Delaware, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Washington, and Washington, D.C. If you live in or own property in one of these states, check that state's tax rules.

Who Actually Pays Estate Tax

Because the federal exemption is high, only about 0.1 percent of estates owe federal estate tax in any given year. Most people's estates are never subject to it. However, if you own a business, significant real estate, or substantial investments, your estate may be large enough to trigger the tax.

Married couples can combine their exemptions, effectively doubling the threshold to $27.22 million in 2024 (if both spouses' exemptions are used through proper planning). This is called portability and requires filing a return even if no tax is owed, to preserve the surviving spouse's unused exemption.

The tax is paid by the estate, not by individual heirs. However, heirs may receive less money because the estate's assets are used to pay the tax bill. In some cases, the executor may need to sell property or investments to raise the cash to pay the tax.

The Exemption Drop After 2025

The current high exemption amounts are temporary. They were set by the Tax Cuts and Jobs Act of 2017 and are scheduled to expire on December 31, 2025. After that date, the exemption is set to revert to approximately $7 million per person (adjusted for inflation), unless Congress passes new legislation to extend or change it.

This means an estate worth $10 million might owe no tax in 2024 or 2025, but could owe significant tax in 2026 if the law does not change. People with estates in the $7 million to $13.61 million range should monitor this issue and may want to discuss planning strategies with an attorney or tax professional.

Congress could extend the current exemption, lower it to a different amount, or make other changes. The outcome is uncertain and depends on future legislation.

Frequently Asked Questions

Do I have to pay estate tax on my house?

Only if your total estate value exceeds the exemption threshold. Your house is counted as part of your estate's total value. If your house is worth $500,000 and your other assets total $13.2 million, your estate is $13.7 million, which exceeds the 2024 exemption of $13.61 million by $90,000. That $90,000 portion would be taxed at 40 percent.

What counts toward the estate tax threshold?

Nearly everything you own is counted: your home, bank accounts, investments, retirement accounts (like IRAs and 401(k)s), life insurance proceeds, vehicles, jewelry, and business interests. Debts like mortgages and loans are subtracted. Gifts you made during your lifetime above a certain annual amount may also count, depending on the year and circumstances.

Can I reduce my estate tax by giving money away before I die?

Yes, but there are limits. You can give up to $18,000 per person per year (in 2024) without it counting toward your lifetime exemption. Larger gifts use up your exemption. An attorney or tax professional can explain strategies like trusts and charitable giving that may lower your estate's tax burden.

Is life insurance included in the taxable estate?

Yes, the proceeds from life insurance policies you own are included in your estate's value for tax purposes. If you own a $2 million policy, that $2 million is part of your taxable estate. Some people use trusts or other structures to own the policy instead, which can remove it from the taxable estate.

What if my spouse dies first — do I lose their unused exemption?

Not if you file the right paperwork. When the first spouse dies, the executor must file an estate tax return and elect portability, which allows the surviving spouse to use the deceased spouse's unused exemption. Without this election, the unused exemption is lost. This is why filing a return is sometimes necessary even when no tax is owed.