The federal estate tax rate is 40% on the value above the exemption threshold

The federal estate tax applies a flat rate of 40% to estates that exceed the exemption amount. That exemption changes each year and is currently much higher than most estates will ever reach — but when it does explore, the 40% rate is straightforward: it takes 40 cents of every dollar above the threshold.

The exemption itself is the real number that matters for your planning. In 2024, the federal exemption is $13.61 million per person, or $27.22 million for a married couple filing jointly. This means a single person can leave $13.61 million to heirs tax-free; anything above that faces the 40% tax. For a married couple, each spouse has their own $13.61 million exemption, and unused exemption can transfer to the surviving spouse through portability.

The exemption amount is set by law and changes annually. It is scheduled to drop significantly after 2025 — to roughly half its current level — unless Congress acts. This creates a real planning decision for people with large estates: whether to use the exemption now or wait and see what Congress does.

Key Takeaways

  • Federal estate tax is 40% on the amount above the exemption, which is $13.61 million per person in 2024.
  • Most estates pay no federal estate tax because they fall below the exemption threshold.
  • The exemption drops after 2025 unless Congress extends it, which affects whether you should transfer assets now or later.
  • State estate taxes vary widely and have much lower exemptions than the federal level, so you may owe state tax even if federal tax does not explore.
  • Married couples can combine exemptions through portability, but you must file a return to preserve unused exemption when the first spouse dies.

Why the exemption matters more than the rate

The 40% rate sounds high, but it only touches estates above the exemption. A $5 million estate in 2024 owes zero federal estate tax. A $20 million estate owes 40% on $6.39 million — roughly $2.56 million — not 40% of the whole thing.

This is why the exemption threshold is the real planning lever. If you have a $15 million estate and the exemption is $13.61 million, you owe tax on $1.39 million. If Congress lets the exemption drop to $7 million after 2025, that same $15 million estate would owe tax on $8 million instead. The rate stays 40%, but your tax bill changes dramatically based on the exemption.

For estates under $13.61 million, the rate is irrelevant — you will not pay federal estate tax at all. This is why most people do not face estate tax, even though the rate is steep when it does explore.

State estate taxes have different rates and lower thresholds

Twelve states plus Washington, D.C. impose their own estate taxes, and they work differently from the federal tax. State rates range from 3.6% to 16%, and the exemptions are much lower — often $1 million to $6 million depending on the state.

New York, for example, has a 3.06% to 16% estate tax with a $6.94 million exemption. Massachusetts has a 0.8% to 16% tax with a $1 million exemption. If you live in or own property in one of these states, you may owe state estate tax even if your estate is below the federal exemption.

Some states also have inheritance taxes, which work differently — they tax the heirs based on their relationship to you and what they receive, not the total estate value. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes. The rates and exemptions vary by state and by how closely related the heir is to you.

How the exemption sunsets after 2025

The current high exemption ($13.61 million per person) was set by the Tax Cuts and Jobs Act of 2017 and is scheduled to expire on December 31, 2025. When it does, the exemption will revert to roughly $7 million per person (adjusted for inflation), unless Congress passes new legislation to extend or change it.

This creates a planning question for people with estates between $7 million and $13.61 million: should you use your exemption now while it is high, or wait and see what Congress does? If you wait and Congress lets it drop, you will have lost the opportunity to transfer assets tax-free. If you use it now and Congress raises it again, you will have used exemption you did not need to.

The answer depends on your age, health, the size of your estate, and your risk tolerance. A 75-year-old with a $12 million estate faces a different calculation than a 45-year-old with the same estate. This is one of the few situations where talking to an estate tax specialist makes sense — the cost of information is small compared to the potential tax difference.

Portability lets married couples combine exemptions

When the first spouse dies, their unused exemption can transfer to the surviving spouse through portability. This means a married couple can effectively shelter $27.22 million from federal estate tax in 2024 (both exemptions combined), even if one spouse dies first.

Portability is automatic in one sense — the law allows it — but it requires action. The surviving spouse must file an estate tax return (Form 706) within nine months of the first spouse's death, even if the estate is below the filing threshold. If you do not file, you lose the unused exemption forever. This is a common and expensive mistake.

Many couples with estates below the exemption do not think they need to file a return, so they skip it. Then the first spouse dies, and the surviving spouse loses the portability benefit. A $50 tax return filing fee would have preserved millions in exemption.

Gifts during life use the same exemption as death transfers

The $13.61 million exemption in 2024 covers both gifts you make while alive and assets you leave at death. If you give away $5 million to your children during your lifetime, you use $5 million of your exemption. When you die, you have only $8.61 million left to shelter from tax.

This is why the exemption is sometimes called the "lifetime exemption" — it is one pool of tax-free transfer capacity, whether you use it now or later. You can give away up to $18,000 per person per year (in 2024) without touching the exemption, but anything above that annual exclusion amount counts against it.

Some people use gifts strategically to move assets out of their taxable estate while the exemption is high, especially if they expect their estate to grow. Others wait until death to transfer everything, because they want to keep control of the assets during their lifetime. Both approaches use the same exemption pool — the choice is about control and timing, not tax rate.

The stepped-up basis at death affects what heirs actually owe in income tax

Estate tax and income tax are separate. Your heirs may owe no estate tax but still face income tax on the assets they inherit. The key is the stepped-up basis — when you die, the cost basis of your assets resets to their fair market value on the date of death.

If you bought stock for $10,000 and it is worth $100,000 when you die, your heirs inherit it with a $100,000 basis. If they sell it when ready, they owe no capital gains tax on the $90,000 gain. This stepped-up basis is one of the largest tax benefits in the code, and it applies to nearly all inherited assets.

This is why holding appreciated assets until death is often better than giving them away during your lifetime. A gift transfers your low cost basis to the recipient; they inherit your $10,000 basis and owe tax on the full $90,000 gain if they sell. At death, they get the stepped-up basis and owe nothing. The trade-off is that you lose control of the asset during your lifetime.

Frequently Asked Questions

Do I have to pay estate tax if my estate is worth $10 million?

Not in 2024. The federal exemption is $13.61 million per person, so a $10 million estate owes no federal estate tax. You may owe state estate tax if you live in one of the twelve states that impose it, depending on your state's exemption threshold. After 2025, if the exemption drops and Congress does not extend it, the answer could change.

What happens to my exemption if I give away $5 million during my lifetime?

You use $5 million of your $13.61 million exemption. When you die, you have $8.61 million left to shelter from tax. The exemption is one pool — gifts and bequests both draw from it. Annual gifts up to $18,000 per recipient do not count against the exemption.

If I am married, can my spouse use my unused exemption when I die?

Yes, through portability. Your spouse can inherit your unused exemption, but only if you file an estate tax return (Form 706) within nine months of your death. If you do not file, the unused exemption is lost forever. This applies even if your estate is below the filing threshold.

Will the estate tax exemption really drop after 2025?

It is scheduled to drop to roughly $7 million per person unless Congress extends the current law. Congress could raise it, lower it further, or eliminate it entirely. The current exemption was set to expire, so change is built into the law — but what Congress will actually do is uncertain.

Is there a difference between estate tax and inheritance tax?

Yes. Estate tax is paid by the estate before assets go to heirs; inheritance tax is paid by the heirs based on what they receive and their relationship to you. Six states have inheritance taxes. Some states have both. The rates and exemptions differ by state.