Estate tax is a federal tax on the total value of a person's property, investments, and assets when they die
Estate tax applies only to estates above a certain dollar threshold. The federal government sets this threshold — called the exemption amount — and it changes every year based on inflation. For 2024, the federal exemption is $13.61 million per person. This means if your estate is worth less than that amount when you die, no federal estate tax is owed. If it exceeds that amount, tax is charged only on the portion above the threshold.
The tax is paid from the estate's assets before money and property pass to heirs. The person managing the estate — usually called the executor — is responsible for calculating what is owed and filing the tax return with the IRS. Most people do not pay estate tax because their estates fall below the exemption. However, some states also charge their own estate or inheritance tax with lower thresholds, so state rules matter even if federal tax does not apply.
Key Takeaways
- Federal estate tax only applies to estates worth more than $13.61 million in 2024, and this threshold changes yearly.
- The tax is paid from the estate itself before heirs receive their inheritance, not by the heirs personally.
- Seventeen states and the District of Columbia charge their own estate or inheritance tax, often with much lower thresholds than the federal amount.
- The federal exemption is set to drop to roughly $7 million per person in 2026 unless Congress changes the law.
How the federal exemption amount works
The exemption is the value of assets you can pass to heirs without triggering federal estate tax. In 2024, that amount is $13.61 million per person. If your estate is worth $10 million, you owe nothing. If it is worth $15 million, tax is owed only on the $1.39 million above the threshold.
Married couples can combine their exemptions, which doubles the protected amount to $27.22 million in 2024. This is called portability, but the surviving spouse must file a tax return after the first spouse dies to preserve the unused exemption. Without that filing, the second spouse loses the first spouse's unused exemption.
The exemption amount is temporary. It was increased by federal law in 2017 and is scheduled to drop to approximately $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress extends or changes it. This means estates that do not owe tax today might owe tax after 2026 if the law is not changed.
What counts as part of your estate
Your estate includes far more than just a house or bank account. It includes real estate, vehicles, investment accounts, retirement accounts (IRAs, 401(k)s), life insurance proceeds, business interests, art, jewelry, and any other property you own at death. It also includes certain gifts you made during your lifetime if they exceeded annual gift tax limits.
Some assets pass outside the estate and do not count toward the exemption. These include property held in a revocable living trust, money in a payable-on-death bank account, life insurance proceeds if the policy is owned by someone other than you, and retirement account beneficiary designations. Jointly owned property with a right of survivorship also passes directly to the surviving owner and typically does not go through the estate.
Debts owed by the estate — mortgages, credit cards, medical bills — reduce the taxable value. The executor pays these debts from estate assets before calculating what is subject to tax.
State estate and inheritance taxes
Seventeen states plus Washington, D.C., charge their own estate tax or inheritance tax. These are separate from federal tax, and you may owe state tax even if your estate is too small for federal tax. State exemption thresholds are much lower than the federal amount.
The difference between estate tax and inheritance tax matters. Estate tax is paid by the estate itself before distribution. Inheritance tax is paid by the person who receives the inheritance. Some states charge both. A few states exempt certain heirs — usually spouses and children — from inheritance tax, while others do not.
| State | Tax Type | Exemption Threshold (approximate) |
|---|---|---|
| Connecticut | Estate tax | $12.92 million |
| Delaware | Estate tax | $5.49 million |
| Illinois | Estate tax | $4 million |
| Iowa | Inheritance tax | No exemption for non-relatives |
| Kentucky | Inheritance tax | No exemption for non-relatives |
| Maine | Estate tax | $6.94 million |
| Maryland | Estate tax | $5.49 million |
| Massachusetts | Estate tax | $1 million |
| Minnesota | Estate tax | $3.3 million |
| Mississippi | Inheritance tax | No exemption for non-relatives |
| Missouri | Inheritance tax | No exemption for non-relatives |
| Montana | Inheritance tax | No exemption for non-relatives |
| Nebraska | Inheritance tax | No exemption for non-relatives |
| New Jersey | Inheritance tax | Exemptions vary by relationship |
| New York | Estate tax | $6.94 million |
| North Carolina | Inheritance tax | No exemption for non-relatives |
| Ohio | Inheritance tax | No exemption for non-relatives |
| Oregon | Estate tax | $1 million |
| Pennsylvania | Inheritance tax | Exemptions vary by relationship |
| Rhode Island | Estate tax | $1.63 million |
| Tennessee | Inheritance tax | No exemption for non-relatives |
| Vermont | Estate tax | $2.75 million |
| Washington | Estate tax | $2.193 million |
| Washington, D.C. | Estate tax | $5.49 million |
If you live in or own property in a state with estate or inheritance tax, the executor must file a state return even if no federal return is required. State thresholds change yearly, so check your state's tax department website for current amounts.
How estate tax is calculated and paid
The executor begins by determining the total value of all estate assets as of the date of death. This is called the gross estate. Next, they subtract debts, funeral expenses, and administrative costs. They also subtract any amount left to a surviving spouse or to charity, since these transfers are not taxed. The remaining amount is the taxable estate.
If the taxable estate exceeds the federal exemption, the executor files Form 706 (the federal estate tax return) with the IRS. The tax rate on the amount over the exemption is 40 percent. For example, if the taxable estate is $14 million and the exemption is $13.61 million, the tax owed is 40 percent of $390,000, which equals $156,000.
The executor pays this tax from estate assets before distributing money and property to heirs. If there is not enough liquid cash, the executor may need to sell assets or borrow money to cover the bill. This is one reason people with large estates sometimes use life insurance or trusts to plan ahead.
Planning strategies to reduce or avoid estate tax
People with estates near or above the exemption threshold often use legal strategies to reduce what their heirs will owe. A revocable living trust allows you to transfer property during your lifetime in a way that keeps you in control but removes the assets from your taxable estate. A irrevocable life insurance trust (ILIT) removes life insurance proceeds from your estate, which can save significant tax if the policy payout is large.
Annual gifts are another tool. You can give up to $18,000 per person per year (in 2024) without using any of your exemption or paying gift tax. Married couples can give $36,000 per recipient per year. Over time, these gifts reduce the size of your taxable estate.
Charitable donations also reduce estate tax. Money left to a may have access to charity is not taxed and does not count against your exemption. Some people use a charitable remainder trust to receive income during their lifetime while leaving the remainder to charity, which provides both a tax deduction and ongoing income.
These strategies require planning with an attorney or tax professional who understands your specific situation. The cost of professional help is often far less than the tax saved.
What happens if no estate tax return is filed
If an estate owes federal tax and the executor does not file Form 706, the IRS will eventually discover this through other records — life insurance companies, banks, and investment firms report large transfers. The IRS can assess the tax owed plus interest and penalties, which compound over time. The executor may also face personal liability for unpaid taxes.
Even if no tax is owed, filing the return may be required to preserve the surviving spouse's unused exemption through portability. Without the filing, that exemption is lost permanently, which can cost the surviving spouse's estate hundreds of thousands of dollars in tax later.
The deadline to file Form 706 is nine months after death, though an extension to 15 months can be requested. An attorney or tax professional can determine whether a return is required in your situation.
Frequently Asked Questions
Do I have to pay estate tax on my house?
Only if your total estate exceeds the exemption threshold. The house is part of your estate value, but it is not taxed separately. If your house is worth $500,000 and your total estate is $12 million, no tax is owed because you are below the $13.61 million federal exemption in 2024. If your total estate is $15 million, tax is owed on the $1.39 million above the threshold, which may include part of the house value.
Can my heirs inherit my retirement accounts without paying estate tax?
Retirement accounts like IRAs and 401(k)s are part of your taxable estate if you own them at death. However, they pass directly to named beneficiaries outside the probate process. If your total estate is below the exemption, no estate tax is owed. The beneficiary will owe income tax when they withdraw money, but that is separate from estate tax.
What is the difference between estate tax and inheritance tax?
Estate tax is paid by the estate before heirs receive anything. Inheritance tax is paid by the person who inherits. Some states charge estate tax, some charge inheritance tax, and some charge both. The state where you live and where you own property determines which applies.
Will the federal exemption really drop in 2026?
Yes, unless Congress changes the law before then. The current $13.61 million exemption is scheduled to expire on December 31, 2025, and the exemption will drop to approximately $7 million per person (adjusted for inflation) starting January 1, 2026. This is a significant change that affects planning for people with estates above $7 million.
Can I give away my money now to avoid estate tax?
You can give away money during your lifetime using the annual gift tax exclusion — $18,000 per person per year in 2024 — without using your exemption or paying tax. Gifts above that amount use your exemption. Once your exemption is used up through gifts, any additional gifts or estate value above the exemption threshold will be taxed at 40 percent. A tax professional can help you decide whether lifetime gifts make sense for your situation.