The federal estate tax applies only to estates worth more than $13.61 million in 2024, and the tax rate on the amount above that threshold is 40 percent

The federal estate tax is a tax on the transfer of property when someone dies. It is separate from income tax and applies only to the largest estates. For 2024, the first $13.61 million of an estate passes to heirs tax-free; anything above that amount is taxed at a flat rate of 40 percent. This threshold is called the exemption, and it changes every year based on inflation.

Because the exemption is so high, fewer than 1 in 1,000 estates owe federal estate tax in any given year. Most people never encounter it. However, the exemption is scheduled to drop to roughly $7 million per person on January 1, 2026, unless Congress changes the law. That change would affect many more estates, which is why some families plan ahead now.

Key Takeaways

  • The federal estate tax exemption for 2024 is $13.61 million per person; estates smaller than this owe no federal estate tax.
  • The tax rate on estates above the exemption is a flat 40 percent, with no brackets or graduated rates.
  • Married couples can combine exemptions to shelter $27.22 million in 2024, but only if the first spouse to die files a return and elects "portability."
  • The exemption drops to approximately $7 million per person on January 1, 2026, unless Congress extends the current law.
  • State estate taxes and inheritance taxes operate separately from federal tax and have their own thresholds and rates.

How the exemption works and why it matters

The exemption is a dollar amount, not a percentage. In 2024, you can pass $13.61 million to your heirs without owing any federal estate tax. If your estate is worth $13.61 million or less, the federal government collects nothing. If it is worth $15 million, only the $1.39 million above the threshold is taxed.

The exemption applies to your lifetime gifts as well as to what you leave at death. If you give away $5 million during your life, you use $5 million of your exemption. When you die, only $8.61 million remains exempt. This is called the unified credit, and it is one exemption pool for both lifetime gifts and death transfers.

The exemption is indexed to inflation and recalculates each January 1. It has risen every year since 2018. The IRS publishes the new amount in late October or early November of the prior year, so you know the figure well before year-end.

The 40 percent tax rate and how it is calculated

Once an estate exceeds the exemption, the federal estate tax is 40 percent on every dollar above the threshold. There are no brackets, no lower rates for smaller amounts, and no phase-ins. The rate is flat.

The calculation is straightforward: take the total value of the estate, subtract the exemption, and multiply the remainder by 0.40. If an estate is worth $20 million in 2024, the taxable amount is $20 million minus $13.61 million, which equals $6.39 million. The tax owed is $6.39 million times 0.40, or $2.556 million.

The estate's executor or administrator is responsible for paying the tax from estate assets before distributing money to heirs. The tax is due nine months after death, though an extension to 15 months is available in some cases.

Portability: how married couples can double their exemption

Married couples have a significant advantage. If the first spouse to die does not use their full exemption, the surviving spouse can claim the unused portion. This is called portability, and it allows a married couple to shelter up to $27.22 million in 2024 (two times $13.61 million).

Portability is not automatic. The executor of the first spouse's estate must file a federal estate tax return—even if no tax is owed—and elect portability on that return. If the return is not filed, the unused exemption is lost forever. This is one of the most common and costly mistakes in estate planning.

The return must be filed within nine months of death (or 15 months with an extension). It is a complex document, and most families hire an estate attorney or tax professional to prepare it. The cost is usually between $2,000 and $5,000, but it can save hundreds of thousands in taxes if the surviving spouse later remarries or has a large estate.

What happens in 2026 when the exemption drops

The current exemption amount is temporary. It was set by the Tax Cuts and Jobs Act of 2017 and is scheduled to expire on December 31, 2025. On January 1, 2026, the exemption will revert to the 2012 level, adjusted for inflation since then. Based on current inflation trends, that amount is expected to be roughly $7 million per person, though the exact figure will not be known until late 2025.

This change is significant. An estate worth $10 million would owe no tax in 2024 but would owe approximately $1.2 million in federal estate tax in 2026 (assuming the $7 million threshold). Families with estates between $7 million and $13.61 million are watching this closely and may take action before the end of 2025.

Congress could extend or change the current exemption before it expires, but there is no may provide. Some proposals would make the exemption permanent; others would lower it further. Until a new law passes, the 2026 sunset date stands.

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 completely separate from the federal tax and have their own exemptions and rates. Some states tax estates as small as $1 million; others use a $5.93 million threshold. Rates range from 3.6 percent to 20 percent, depending on the state and the relationship of the heir to the deceased.

A few states have both an estate tax (paid by the estate) and an inheritance tax (paid by the heir). New Jersey and Pennsylvania are examples. If you live in or own property in a state with an estate or inheritance tax, you may owe state tax even if you owe no federal tax.

State tax planning is often more urgent than federal planning, because state exemptions are lower and rates can be higher. An estate attorney in your state can tell you whether state tax applies to your situation.

How the IRS values an estate for tax purposes

The value of an estate is not always obvious. Real estate is appraised by a professional. Stocks and bonds are valued at their market price on the date of death. Closely held business interests, art, and collectibles often require a formal appraisal by a may have access to appraiser.

The executor must report the total value on the federal estate tax return (Form 706), which is filed with the IRS. The IRS can challenge the valuation if it believes the value is too low. This is why professional appraisals matter: they create a documented record and reduce the risk of an audit.

Life insurance proceeds are included in the estate if the deceased owned the policy or had "incidents of ownership" over it—such as the right to change the beneficiary or borrow against it. This surprises many people. A common planning strategy is to have life insurance owned by an irrevocable trust so that the proceeds are not included in the taxable estate.

Frequently Asked Questions

Does the federal estate tax explore to my house?

Only if your total estate exceeds the exemption. The house is part of the estate's value, but it is not taxed separately. If your house is worth $2 million and your total estate is $10 million, no federal estate tax is owed in 2024. If your total estate is $20 million, the house contributes to the taxable amount above $13.61 million.

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

Federal estate tax is paid by the estate before heirs receive their money. Inheritance tax is paid by the heir and is imposed by some states, not the federal government. A few states have both. The rates, exemptions, and rules are different for each.

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

Yes, but it uses your exemption. Gifts during your lifetime count against the same $13.61 million exemption that applies at death. You can give up to $18,000 per person per year (in 2024) without using any exemption, but larger gifts do. An estate attorney can explain strategies that may reduce taxes, such as trusts or family partnerships.

If I die in 2025, do I get the higher exemption or the lower one?

You get the 2025 exemption, which is expected to be around $13.99 million. The drop to approximately $7 million happens on January 1, 2026. If you die on December 31, 2025, your estate uses the higher amount. If you die on January 1, 2026, it uses the lower amount.

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

Not for federal tax purposes, unless you want to elect portability for a surviving spouse. If you are married and want your spouse to use your unused exemption, the executor must file Form 706 even if no tax is owed. Otherwise, no federal return is required for estates below the exemption.