The federal estate tax rate is 40 percent, but only on the value above a threshold that changes yearly

The federal estate tax applies a flat 40 percent rate to estates that exceed a certain value. That threshold — called the exemption amount — is $13.61 million per person in 2024. If your estate is worth less than that, no federal estate tax is owed at all. If it exceeds that amount, the 40 percent tax applies only to the overage, not the whole estate.

The exemption amount is not permanent. It is set by federal law and changes based on inflation adjustments each year. In 2026, it is scheduled to drop to roughly $7 million per person unless Congress acts to change the law. State estate taxes, if your state has one, operate separately and have their own rates and thresholds — some as low as $1 million or less.

Because the exemption is high and the tax applies to relatively few estates, most people do not owe federal estate tax. The IRS estimates that fewer than 1 in 1,000 estates nationwide pay it in any given year. But if you own a business, significant real estate, or investments, or if you are married and your combined assets are substantial, the tax can matter.

Key Takeaways

  • The federal estate tax rate is a flat 40 percent on the portion of an estate that exceeds $13.61 million per person in 2024.
  • The exemption amount adjusts for inflation each year and is scheduled to drop to approximately $7 million per person in 2026 unless Congress changes the law.
  • Married couples can combine their exemptions, effectively doubling the threshold to $27.22 million in 2024, if the surviving spouse makes a specific election.
  • State estate taxes have separate rates and thresholds and may apply even when no federal tax is owed.
  • The tax applies only to estates above the threshold; estates below it owe nothing regardless of size.

How the 40 percent rate works with the exemption

The estate tax is not a percentage of your whole estate. It is a tax on the excess. If your estate is worth $15 million and the exemption is $13.61 million, only $1.39 million is subject to tax. At 40 percent, that means $556,000 in federal estate tax owed by your estate.

The exemption applies once, at death. Your executor or estate representative uses it to reduce the taxable value of what you leave behind. If you give away money or property during your lifetime, those gifts may also use up your exemption — the lifetime gift tax exemption is the same amount as the estate tax exemption and they share a single pool. A gift of $1 million during your life reduces the exemption available at death by $1 million.

For married couples, each spouse has their own exemption. A surviving spouse can elect to use any unused exemption from the deceased spouse — a process called portability — which effectively doubles the exemption to $27.22 million in 2024. This election must be made on the estate tax return within nine months of death, even if no tax is owed.

Why the exemption amount changes every year

Congress sets the exemption amount in law, but it adjusts automatically each year based on inflation. The IRS announces the new amount in October or November for the following year. In 2023, the exemption was $12.92 million. In 2024, it rose to $13.61 million. The increase reflects the cost-of-living adjustment applied to federal tax brackets.

The scheduled drop in 2026 is not automatic inflation — it is the result of a specific law passed in 2017. That law doubled the exemption temporarily and set it to expire at the end of 2025. When that law expires, the exemption will revert to a lower amount, adjusted for inflation from its pre-2017 level. Unless Congress passes new legislation, the exemption will fall to roughly $7 million per person in 2026.

State estate taxes and inheritance taxes

Twelve states and the District of Columbia have their own estate taxes. These are separate from the federal tax and apply based on where the deceased person lived or owned property. State exemption amounts are much lower than the federal threshold — some states set it at $1 million, others at $2 million or $3 million. A few states have no exemption at all.

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 itself. Six states have inheritance taxes. Iowa, Kentucky, Maryland, New Jersey, and Pennsylvania tax inheritances, and Nebraska taxes both estates and inheritances. The rates and exemptions vary by state and often depend on the relationship between the deceased and the heir.

If you live in a state with an estate tax or inheritance tax, you may owe state tax even if your estate is below the federal threshold. A few states have reciprocal agreements that reduce or eliminate tax if the heir lives in another state, but most do not.

Who actually pays the estate tax

The estate itself pays the federal estate tax, not the heirs. The executor or personal representative of the estate collects assets, pays debts and taxes, and distributes what remains to beneficiaries. If the estate owes tax, it comes out before anyone receives their inheritance. This means heirs may receive less than they would have if no tax were owed.

Some people use life insurance or other strategies to set aside money specifically to pay the tax, so that heirs do not have to sell assets like a family business or farm to cover the bill. Others structure their estates or make lifetime gifts to reduce the taxable value. These strategies require planning and often involve a lawyer or tax professional.

What triggers an estate tax return even with no tax owed

An estate tax return (Form 706) must be filed if the estate's gross value exceeds the exemption amount at the time of death, even if no tax is ultimately owed. This is because the return is how the executor reports the value of the estate and claims the exemption. Filing the return also starts the statute of limitations for the IRS to audit the estate.

For married couples, filing a return is especially important even if no tax is owed, because that is how the surviving spouse elects portability and preserves the unused exemption. Without that election on the return, the deceased spouse's unused exemption is lost forever.

The deadline to file Form 706 is nine months after death, though an extension can be requested. State estate tax returns, if required, have their own deadlines and forms.

Frequently Asked Questions

Does my estate owe federal tax if it is worth $10 million?

No. In 2024, the exemption is $13.61 million per person. An estate worth $10 million is below that threshold and owes no federal estate tax. If you are married and your spouse has not used their exemption, the combined threshold is $27.22 million. State estate taxes, if your state has one, may still apply depending on the state's own threshold.

What happens to the exemption in 2026?

The exemption is scheduled to drop to approximately $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress passes new legislation. This is the result of a temporary increase that expires at the end of 2025. If you have a large estate, this change may affect your planning.

Can I reduce my estate tax by giving money away now?

Yes, but gifts use up your exemption. You can give up to $18,000 per person per year (in 2024) without using your exemption — this is the annual exclusion amount. Gifts above that amount reduce your lifetime exemption dollar-for-dollar. A lawyer or tax professional can help you decide whether lifetime gifts make sense for your situation.

If I live in a state with an estate tax, do I pay both state and federal tax?

Possibly. The federal and state taxes are separate. You may owe federal tax, state tax, both, or neither depending on your estate's value and your state's thresholds. Some states allow a credit for federal tax paid, which reduces the state tax owed. Check your state's rules or speak with a tax professional.

What is the difference between an estate tax and an inheritance tax?

An estate tax is paid by the estate before heirs receive anything. An inheritance tax is paid by the person who receives the money or property. Six states have inheritance taxes; twelve states and D.C. have estate taxes. A few states have both. The rates and exemptions differ by state.