Estate tax rates are set by federal law and vary based on how much your estate is worth
The federal estate tax rate is a flat 40 percent on the value of an estate that exceeds the exemption threshold. That threshold changes each year based on inflation. For 2024, the federal exemption is $13.61 million per person — meaning estates smaller than that owe no federal tax at all. For 2025, it rises to $13.99 million. After 2025, the exemption drops back to roughly $7 million (adjusted for inflation) unless Congress changes the law.
The 40 percent rate applies only to the amount over the exemption. If your estate is worth $14 million and the exemption is $13.61 million, only $390,000 is taxed at 40 percent — which equals $156,000 in federal estate tax. The rest passes to your heirs tax-free.
Some states also impose their own estate taxes or inheritance taxes, which operate separately from the federal tax. State rates and exemptions vary widely. Some states have no estate tax at all; others tax estates as small as $1 million and charge rates between 3 and 16 percent. Your state's rules matter just as much as the federal ones, depending on where you live and where your property is located.
Key Takeaways
- The federal estate tax rate is 40 percent, but only on the portion of your estate that exceeds the exemption threshold, which is $13.99 million for 2025.
- Estates worth less than the exemption owe no federal estate tax, regardless of size.
- State estate taxes and inheritance taxes operate independently and may apply to much smaller estates, with rates ranging from 3 to 16 percent depending on the state.
- The federal exemption is scheduled to drop to approximately $7 million in 2026 unless Congress extends the current law.
How the 40 percent federal rate is calculated
Estate tax is not charged on your entire estate value. It applies only to the amount that exceeds the exemption. This is called the taxable estate. The IRS calculates it by taking the total value of everything you own at death — real estate, bank accounts, investments, retirement accounts, life insurance proceeds, and personal property — and subtracting the exemption amount.
If your taxable estate is zero or negative (meaning your estate is smaller than the exemption), your heirs owe no federal estate tax. If your taxable estate is positive, the IRS multiplies that amount by 0.40 to determine the tax bill. A $15 million estate with a $13.99 million exemption has a taxable estate of $1.01 million. Forty percent of $1.01 million is $404,000.
The executor of your estate — the person named in your will to handle your affairs — is responsible for filing the estate tax return with the IRS and paying the tax before distributing money to heirs. If the estate does not have enough liquid cash, the executor may need to sell property or investments to cover the bill.
Why the exemption amount changes every year
Congress set the current exemption amounts to adjust automatically each year for inflation. The IRS publishes the new exemption in late October or early November for the following year. This means the threshold you need to worry about shifts annually.
The exemption is scheduled to sunset — to drop significantly — on January 1, 2026, unless Congress passes new legislation. At that point, the exemption is set to fall to approximately $7 million per person (adjusted for inflation that year). This means estates worth more than $7 million would suddenly face federal tax, even if they would have been exempt under the 2025 rules. Many families with estates between $7 million and $14 million are watching this deadline closely and may make changes to their plans before 2026.
State estate taxes and inheritance taxes operate separately
Twelve states plus Washington, D.C., impose their own estate taxes. These are separate from the federal tax — you may owe both. State exemptions are much lower than the federal threshold. Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington all have state estate taxes. Exemptions range from $1 million to $6.94 million, depending on the state.
Six states — Indiana, Iowa, Kentucky, Maryland, Nebraska, and New Jersey — impose inheritance taxes instead of estate taxes. The difference matters: an inheritance tax is charged to the person who receives the money (the heir), not to the estate itself. Rates vary by state and often depend on the relationship between the deceased and the heir. A spouse might pay nothing, while a distant relative might pay 15 percent or more.
If you own property in multiple states, you may owe estate or inheritance tax in more than one state. A person who lives in New York and owns a vacation home in Florida, for example, may owe New York state estate tax on the entire estate but no Florida tax (since Florida has no estate tax). The rules are complex and depend on where you are domiciled and where your property sits.
Who actually pays the estate tax
The estate itself pays the federal tax, not the individual heirs. The executor withdraws money from the estate to cover the bill before distributing the remainder to beneficiaries. This means heirs receive less than they would have if no tax were owed.
With state inheritance taxes, the situation is different. The heir who receives the money is technically responsible for the tax, though in practice the executor often pays it from the estate on the heir's behalf. The specific rules depend on the state and the terms of the will.
Life insurance proceeds are included in the taxable estate unless the policy is owned by an irrevocable trust or another person. Retirement accounts like IRAs and 401(k)s are also included. Some families use life insurance or trusts specifically to cover the expected tax bill, so heirs do not have to sell property or investments to pay it.
What happens if your estate is close to the exemption threshold
Estates worth $12 million to $15 million — near the current exemption — face a real decision. If the exemption drops in 2026, an estate that is exempt today might owe tax in a few years. Some families work with an estate planning attorney to restructure their assets, set up trusts, or make gifts during their lifetime to reduce the taxable estate below the threshold.
Married couples can combine their exemptions, doubling the threshold. A married couple can each leave $13.99 million in 2025 before federal tax applies — $27.98 million total. This is called portability, and it requires filing an estate tax return even if no tax is owed, to preserve the unused exemption for the surviving spouse.
These strategies are not available to everyone and depend on your specific situation, family structure, and state of residence. An attorney who specializes in estate planning can review your circumstances and explain what options exist.
Frequently Asked Questions
Is the 40 percent rate the same in every state?
No. The 40 percent rate applies only to federal estate tax. States that have their own estate taxes charge different rates — typically 3 to 16 percent — and have much lower exemptions. You may owe both federal and state tax, or only one, depending on where you live and the size of your estate.
What if my estate is worth exactly the exemption amount?
You owe no federal estate tax. The exemption is the threshold; anything at or below it is not taxed. Your heirs receive the full amount. You still may need to file an estate tax return if you are married and want to preserve portability for your spouse.
Does the 40 percent rate apply to life insurance?
Yes, unless the policy is owned by a trust or another person. Life insurance proceeds are counted as part of your taxable estate. If your estate is large enough to owe tax, the insurance payout increases the tax bill unless you have structured the policy ownership differently.
What happens to the exemption after 2025?
The exemption is scheduled to drop to approximately $7 million per person on January 1, 2026, unless Congress extends the current law. This would mean estates worth more than $7 million suddenly face federal tax. Many families are planning ahead for this change.