The Estate Tax Exemption Explained

The estate tax exemption is a dollar amount that lets you pass money and property to your heirs without owing federal estate tax. If your estate is worth less than the exemption amount, no federal estate tax is due, regardless of how you leave it. If your estate exceeds the exemption, only the amount above it gets taxed — and the tax rate is steep, currently 40 percent on the excess.

The exemption amount changes every year based on inflation. For 2024, the federal exemption is $13.61 million per person. This means a single person can leave up to $13.61 million tax-free, and a married couple can leave up to $27.22 million combined (if both spouses use their exemptions). However, this exemption is scheduled to drop significantly on January 1, 2026 — it will fall to roughly $7 million per person unless Congress changes the law.

Key Takeaways

  • The estate tax exemption is a threshold: estates below it owe no federal estate tax, and estates above it pay 40 percent tax only on the excess amount.
  • For 2024, the exemption is $13.61 million per person, but it is set to drop to approximately $7 million on January 1, 2026, unless Congress acts.
  • Married couples can combine their exemptions to shelter up to $27.22 million in 2024, but only if the surviving spouse takes steps to preserve the unused exemption.
  • State estate taxes and inheritance taxes operate separately from the federal exemption and may apply to smaller estates depending on where you live.
  • The exemption applies only to federal tax; it does not affect income tax, capital gains tax, or state-level taxes on estates.

How the Exemption Amount Is Set Each Year

The IRS adjusts the exemption annually for inflation. The adjustment is tied to the Consumer Price Index and is announced in late October for the following year. This means the amount you can pass tax-free changes every January 1. In recent years, the exemption has grown steadily — it was $12.92 million in 2023 and $13.61 million in 2024.

The exemption is not permanent at its current level. Under current federal law, it is scheduled to sunset on December 31, 2025. Starting January 1, 2026, the exemption will revert to the 2009 level, adjusted for inflation, which is projected to be around $7 million per person. This means estates between $7 million and $13.61 million that do nothing now could face a significant tax bill after 2025 if Congress does not extend the higher exemption.

How Married Couples Can Use the Exemption

Married couples have an advantage: each spouse has their own exemption. A husband and wife can each shelter $13.61 million in 2024, for a combined total of $27.22 million. However, this only works if both spouses actually use their exemptions. If one spouse dies and leaves everything to the surviving spouse, the deceased spouse's unused exemption is lost unless the surviving spouse takes a specific step called portability election.

Portability election means the surviving spouse files a federal estate tax return (Form 706) within nine months of the deceased spouse's death, even if no tax is owed. This preserves the deceased spouse's unused exemption so the survivor can use it later. Without this filing, the exemption disappears. Many couples with estates under the exemption threshold skip this step because they assume no return is needed — but doing so costs them millions in future tax protection.

The Difference Between Federal and State Estate Taxes

The federal estate tax exemption does not protect you from state-level taxes. Seventeen states plus Washington, D.C., have their own estate taxes or inheritance taxes, and most of these states have much lower exemption thresholds than the federal level. For example, Massachusetts has a state estate tax exemption of $1 million, and New York's is $6.94 million in 2024. Oregon's is $1 million.

This means an estate worth $5 million might owe no federal estate tax but could owe state estate tax in Massachusetts or Oregon. The state tax is calculated separately and is not reduced by the federal exemption. If you own property in multiple states or live in a state with an estate tax, you need to plan for both the federal and state thresholds.

What Happens to Estates Above the Exemption

If your estate exceeds the exemption amount, only the excess is taxed. The tax rate is 40 percent, which is one of the highest tax rates in the federal system. For example, if you die in 2024 with an $18 million estate, the first $13.61 million is protected by the exemption. The remaining $4.39 million is taxed at 40 percent, resulting in a $1.756 million tax bill.

The estate pays this tax before heirs receive their inheritance. This means heirs may receive less than you intended if the estate does not have enough liquid assets to cover the tax. Some families use life insurance or other strategies to set aside money specifically to pay the estate tax, so the heirs do not have to sell property or investments to cover it.

Planning for the 2026 Exemption Drop

The scheduled drop in the exemption on January 1, 2026, creates a planning window for estates between $7 million and $13.61 million. Some people in this range are considering using their exemption now through lifetime gifts — giving money or property to heirs during their lifetime rather than waiting to leave it in their will. Any gift made now uses the current $13.61 million exemption; after 2025, the exemption will be lower.

This strategy is not right for everyone. It requires giving up control of assets during your lifetime, and it has tax and legal consequences that vary depending on your situation. Anyone with an estate over $7 million should speak with an estate planning attorney or tax professional to understand whether this approach makes sense for them and what the actual steps would be.

How the Exemption Interacts with Other Taxes

The estate tax exemption is separate from income tax, capital gains tax, and gift tax, though they are related. When you inherit money or property, you do not owe income tax on the inheritance itself — that is handled by the estate. However, if the inherited asset later generates income (like rental property or dividends), that income is taxable to you as the heir.

Inherited property also receives a step-up in basis, which means its value is reset to the fair market value on the date of death. If you inherit stock worth $100,000 that your parent bought for $20,000, your basis is $100,000, not $20,000. This step-up can save heirs significant capital gains tax if they sell the asset soon after inheriting it. The step-up applies regardless of whether the estate owed estate tax.

Frequently Asked Questions

Do I need to file an estate tax return if my estate is below the exemption?

Not for federal purposes, unless you want to preserve your spouse's unused exemption through portability election. However, you may need to file a state return depending on where you live and the size of your estate. Check your state's requirements or consult a tax professional.

Can I give away money now to avoid estate tax later?

Yes, lifetime gifts use your exemption, and any amount you give away during your lifetime reduces the amount subject to estate tax when you die. However, this means giving up control of the money now, and there are legal and tax consequences depending on how much you give and to whom. An estate planning attorney can explain whether this makes sense for your situation.

What happens to my exemption if I move to a different state?

The federal exemption follows you — it applies no matter where you live. However, if you move to a state with an estate tax, that state's exemption applies to your property located in that state. If you own property in multiple states, each state's tax rules may apply to property within its borders.

Does the exemption protect life insurance proceeds?

Life insurance proceeds are included in your taxable estate and count toward the exemption threshold. However, if you own the policy in an irrevocable life insurance trust (ILIT), the proceeds may be excluded from your estate. This is a specialized strategy that requires professional guidance to set up correctly.

What if Congress does not extend the exemption after 2025?

If no action is taken, the exemption will drop to approximately $7 million per person on January 1, 2026. Estates between $7 million and $13.61 million would then owe federal estate tax. Congress could extend the current exemption, lower it to a different amount, or make other changes, but as of now, the drop is scheduled to happen unless the law changes.