The federal estate tax applies only 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 when they die. It applies only if the estate exceeds a threshold amount, called the exemption. For 2024, that exemption is $13.61 million per person. If your estate is smaller than that, no federal estate tax is owed, regardless of who inherits it.

The tax rate itself is 40 percent on the value above the exemption. So if an estate is worth $14 million, only the $390,000 above the exemption is taxed, and the tax owed would be $156,000. The exemption amount changes each year based on inflation, so the threshold will be different in 2025.

The exemption is per person, not per estate. A married couple can combine their exemptions, meaning a married couple's combined exemption in 2024 is $27.22 million. This is called portability, and it requires the surviving spouse to file a federal estate tax return even if no tax is owed, in order to preserve the unused exemption.

Key Takeaways

  • Federal estate tax only applies to estates worth more than $13.61 million in 2024, and the tax rate on amounts above that is 40 percent.
  • The exemption amount changes each year with inflation, so you should check the current year's threshold before assuming your estate will owe tax.
  • Married couples can combine exemptions to reach $27.22 million in 2024, but the surviving spouse must file a return to preserve the unused exemption.
  • Most estates owe no federal estate tax because they fall below the exemption threshold, though state estate taxes may still apply.

How the exemption changes year to year

The federal exemption is adjusted annually for inflation. In 2023, it was $12.92 million per person. In 2024, it rose to $13.61 million. The IRS publishes the new exemption amount in October or November of each year, so you can plan based on the amount that will apply when you die.

However, there is a significant change coming. The exemption is scheduled to drop to approximately $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress extends the current law. This means estates that would not owe tax in 2024 or 2025 could owe tax after 2025 if the exemption drops as scheduled. Some families use this timing to make large gifts before the exemption shrinks, since gifts during life use the same exemption as the estate.

What counts toward the estate value

The estate includes not just bank accounts and real estate, but also life insurance proceeds, retirement accounts, investment accounts, vehicles, and personal property. The value is based on what the property was worth on the date of death, not what was paid for it years earlier.

Some assets pass outside the estate and do not count toward the exemption. These include property left through a payable-on-death account, life insurance with a named beneficiary, retirement accounts with a named beneficiary, and property held in certain trusts. Understanding which assets are included in the taxable estate is important for planning, because it affects whether the exemption will be exceeded.

State estate taxes and inheritance taxes

Seventeen states plus Washington, D.C., have their own estate taxes. These state taxes have lower exemptions than the federal exemption, sometimes as low as $1 million or $2 million. Even if your estate is below the federal exemption, you may owe state estate tax.

Six 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 itself. The tax rate and exemptions vary by state and by the relationship between the deceased and the heir. A spouse or child may owe no tax, while a more distant relative might. You should check your state's rules if you live in or own property in a state with an estate or inheritance tax.

How the tax is paid and reported

If an estate owes federal estate tax, the executor or administrator of the estate files Form 706, the federal estate tax return, with the IRS. This return is due nine months after the date of death, though an extension can be requested. The tax is paid from the estate's assets before the remaining property is distributed to heirs.

If the estate is below the exemption, no federal return is required. However, if the estate is close to the exemption or if the surviving spouse wants to preserve an unused exemption through portability, a return should still be filed even if no tax is owed. State returns may also be required depending on where you live and the size of the estate.

Planning strategies when an estate is large

Families with estates above the exemption sometimes use trusts, gifts, or charitable donations to reduce the taxable value. A revocable living trust does not reduce estate taxes by itself, but an irrevocable trust can remove assets from the taxable estate if set up correctly. Gifts made during life also use the exemption, so some people give money to family members or charities before death to reduce what the estate will owe.

Annual gifts up to $18,000 per person (in 2024) do not use the exemption and are not taxed. Larger gifts use the exemption but are not immediately taxed. Charitable donations can also reduce the taxable estate. These strategies require planning with an attorney or tax professional, because the rules are complex and mistakes can be costly.

Frequently Asked Questions

Do I need to worry about federal estate tax if I own a house and have savings?

Probably not. The exemption is $13.61 million in 2024, so unless your house, savings, retirement accounts, life insurance, and other property add up to more than that, federal estate tax will not apply. However, check your state's rules, because some states have much lower exemptions.

What happens to the exemption after 2025?

The exemption is scheduled to drop to around $7 million per person on January 1, 2026, unless Congress changes the law. This means estates between $7 million and $13.61 million that would not owe tax now could owe tax after 2025. Families with large estates sometimes make gifts or set up trusts before the exemption drops.

If I'm married, can my spouse use my unused exemption?

Yes, through portability. If you die first and your spouse survives you, your spouse can preserve your unused exemption by filing a federal estate tax return within nine months of your death. This allows your spouse to use both exemptions when they die, but the return must be filed even if no tax is owed.

Does life insurance count toward the estate tax exemption?

Yes, if you own the policy or if the proceeds are payable to your estate. If someone else owns the policy or it names a beneficiary other than your estate, it may not count. The way life insurance is owned and titled makes a big difference in whether it is taxed.

Can I reduce my estate taxes by giving money to my children now?

Yes. Gifts during life use the same exemption as the estate, but you can give up to $18,000 per person per year without using any exemption. Larger gifts use the exemption but are not immediately taxed. A tax professional can help you plan gifts in a way that reduces what your estate will owe.