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 only applies if the estate exceeds a threshold called the exemption amount. For 2024, that threshold is $13.61 million per person. If your estate is smaller than that, no federal estate tax is owed, regardless of how you leave the money.

The tax rate on the portion of an estate that exceeds the exemption is a flat 40 percent. This rate has not changed since 2013. However, the exemption amount changes every year based on inflation. It was $12.92 million in 2023 and will be $13.61 million in 2024. The IRS announces the new exemption each October for the following year.

The exemption is scheduled to drop significantly after 2025. Unless Congress changes the law, the exemption will fall to roughly $7 million per person (adjusted for inflation) starting January 1, 2026. This is sometimes called the "sunset" of the Tax Cuts and Jobs Act of 2017.

Key Takeaways

  • Federal estate tax only applies to estates worth more than $13.61 million in 2024, so most people will not owe it.
  • The tax rate on amounts above the exemption is a flat 40 percent with no brackets or deductions.
  • The exemption amount rises each year with inflation and is announced by the IRS in October for the following year.
  • Married couples can combine their exemptions to $27.22 million in 2024 if they file a joint return and use portability.
  • The exemption is set to drop to approximately $7 million per person on January 1, 2026, unless Congress extends the current law.

How the exemption works with married couples

Married couples have two separate exemptions. In 2024, each spouse has a $13.61 million exemption, for a combined total of $27.22 million. This means a married couple can pass $27.22 million to their heirs without owing any federal estate tax.

To use both exemptions, the surviving spouse must file an estate tax return (Form 706) and elect portability — even if no tax is owed. Portability allows the surviving spouse to use any unused exemption from the first spouse who died. Without this election, the second spouse loses the first spouse's unused exemption when they die.

If a couple does not file the return and elect portability, only the surviving spouse's exemption applies to their own estate. This can result in a much larger taxable estate and a significant tax bill for heirs.

What happens if an estate exceeds the exemption

If an estate is larger than the exemption, the executor must file a federal estate tax return (Form 706) with the IRS. The return is due nine months after the person's death, though an extension can be requested.

The tax is calculated on the amount by which the estate exceeds the exemption. For example, if an estate is worth $15 million in 2024, the taxable portion is $1.39 million ($15 million minus $13.61 million). The federal estate tax owed would be $556,000 (40 percent of $1.39 million).

The executor is responsible for paying the tax from estate assets before distributing money to heirs. If the estate does not have enough liquid assets (cash or easily sold property), the executor may need to sell property or borrow money to pay the bill.

State estate taxes and inheritance taxes are separate

Seventeen states and the District of Columbia have their own estate taxes or inheritance taxes. These are separate from the federal tax and have their own exemption amounts, which are usually much lower than the federal exemption.

Some states have exemptions as low as $1 million or $2 million. A few states have no exemption at all — meaning any amount of property transferred at death is subject to state tax. If you live in or own property in a state with an estate tax, you may owe state tax even if you do not owe federal tax.

State tax rates also vary. Most range from 10 to 16 percent, which is lower than the federal rate but still significant. An estate planning attorney in your state can tell you whether state tax applies to your situation.

The 2026 exemption drop and planning considerations

The current federal exemption is set to expire on December 31, 2025. Starting January 1, 2026, the exemption will drop to approximately $7 million per person (adjusted for inflation), unless Congress passes new legislation to extend it. This means the exemption could be cut roughly in half overnight.

Some people with estates between $7 million and $13.61 million are considering whether to make large gifts now while the higher exemption is in place. Gifts made during life use the same exemption as the estate, so giving away money now reduces the taxable estate later. However, this strategy requires careful planning and may not be right for everyone.

If you think your estate might be affected by the 2026 change, speaking with an estate planning attorney or tax professional is important. They can review your specific situation and discuss whether any planning makes sense for you.

How property value is determined for estate tax purposes

The IRS values an estate based on the fair market value of all property on the date of death. Fair market value is what a willing buyer would pay a willing seller, not the price the owner paid or what they think it is worth.

For real estate, this usually means an appraisal. For stocks and bonds, it is the closing price on the date of death. For a business, the valuation can be more complex and may require a professional business appraiser. Personal property like art, jewelry, or vehicles also needs to be appraised if the estate is large enough to require a tax return.

The executor or the estate's representative is responsible for gathering these valuations and reporting them on Form 706. Undervaluing property to reduce the taxable estate is illegal and can result in penalties and interest.

Frequently Asked Questions

Do I owe federal estate tax if my estate is worth less than the exemption?

No. If your estate is worth $13.61 million or less in 2024, no federal estate tax is owed. Your heirs receive the full amount. You do not need to file a federal estate tax return unless your estate exceeds the exemption or you made large gifts during your lifetime.

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

Yes. Gifts made during your lifetime use the same exemption as your estate. You can give up to $13.61 million total (in 2024) during your life or at death without owing federal tax. You can also give up to $18,000 per person per year without using any of your exemption. A tax professional can help you decide if this strategy makes sense for your situation.

What if I die in 2026 when the exemption drops?

If you die after December 31, 2025, the exemption will be approximately $7 million per person unless Congress changes the law. An estate worth $10 million would then owe federal tax on the $3 million above the exemption. This is why some people are reviewing their plans now while the higher exemption is still in place.

Does life insurance count toward the estate tax exemption?

Yes. The proceeds of a life insurance policy are included in your taxable estate if you own the policy or if the policy is payable to your estate. However, if someone else owns the policy (like an adult child or a trust), the proceeds may not be included in your estate. This is a common estate planning strategy, but it requires proper setup.

What is the difference between estate tax and income tax on inherited money?

Estate tax is paid by the estate before money goes to heirs. Income tax is paid on earnings (interest, dividends, rent) generated by inherited property after the person dies. Heirs generally do not owe income tax on the inherited amount itself, but they do owe tax on income the inherited property produces going forward.