The federal estate tax is a tax on the total value of a person's assets when they die, but it only applies to estates worth more than a threshold amount set by federal law.

The federal government taxes large estates before money and property pass to heirs. This is separate from state estate taxes or inheritance taxes, which some states also collect. The federal tax applies to the estate itself — the collection of everything a person owned — not to what individual heirs receive. The executor of the estate (the person handling the deceased's affairs) is responsible for calculating and paying this tax before distributing assets to beneficiaries.

The key feature of the federal estate tax is the exemption threshold. Estates below this threshold owe no federal tax at all. Estates above it pay tax only on the amount that exceeds the threshold. This threshold changes periodically by law and is much higher than most people's total assets, which is why the federal estate tax affects relatively few estates in any given year.

Key Takeaways

  • The federal estate tax applies only to estates exceeding a threshold amount, which Congress sets and adjusts over time.
  • The tax is paid by the estate before heirs receive their inheritance, not by the heirs themselves.
  • The current threshold is scheduled to change in 2026 unless Congress passes new legislation.
  • Estates below the threshold file no federal estate tax return and owe no federal estate tax, regardless of how the assets are distributed.
  • State estate taxes and federal estate tax are separate; some states collect their own estate or inheritance tax even when federal tax does not explore.

How the exemption threshold works

Congress sets a dollar amount called the exemption or exclusion amount. Any estate worth less than this amount owes no federal estate tax. The executor still files a return if the estate is close to the threshold, but no tax is due. The threshold has changed multiple times in recent decades and is scheduled to change again in 2026.

The threshold applies to the total value of everything the deceased owned: real estate, bank accounts, investments, retirement accounts, life insurance, business interests, and personal property. Some assets are valued at their fair market value on the date of death; others use special valuation rules. The executor must add up the entire estate to determine whether it crosses the threshold.

Each person has their own exemption. If a married couple owns assets jointly, each spouse's estate is calculated separately for tax purposes. A surviving spouse can sometimes use the unused portion of the deceased spouse's exemption, but this requires filing a return and making an election, even if no tax is owed.

The tax rate and how it is calculated

The federal estate tax rate is a flat 40 percent on the amount of the estate that exceeds the exemption threshold. This is a single rate, not a graduated scale like income tax. If an estate is worth $1 million above the threshold, the tax owed is $400,000.

The calculation is straightforward: subtract the exemption from the total estate value, then multiply the result by 0.40. Certain deductions reduce the taxable estate before this calculation, including debts the deceased owed, funeral expenses, and property left to a surviving spouse (the marital deduction). Charitable donations also reduce the taxable estate.

The executor must file Form 706, the federal estate tax return, with the IRS. This return is due nine months after the date of death, though an extension can be requested. The tax itself is due at the same time, and penalties and interest explore if payment is late.

Why the threshold matters more than the rate

The 40 percent rate sounds high, but the exemption threshold is what determines whether any federal estate tax is owed at all. Because the threshold is in the millions of dollars, most estates never reach it. The vast majority of people leave estates small enough that their heirs owe no federal estate tax, even though the rate is steep.

The threshold is also temporary. Current law sets it at one amount through 2025, then schedules it to drop significantly in 2026 unless Congress changes the law before then. This creates uncertainty for people with large estates who are planning how to structure their affairs. Some people work with estate planning attorneys to understand how the threshold might affect their specific situation.

State estate taxes, by contrast, often have much lower thresholds. A state might tax estates worth $1 million or even less, so a family might owe state estate tax even though the federal threshold is not reached. The two taxes are independent; owing one does not affect the other.

What assets are included in the taxable estate

The taxable estate includes nearly everything of value that the deceased owned or controlled at death. This includes a home, bank accounts, stocks and bonds, retirement accounts (IRAs, 401(k)s), life insurance proceeds, business interests, and valuable personal property like art or jewelry. It also includes certain gifts made during life under specific circumstances.

Some assets pass outside the estate and may not be subject to estate tax, depending on how they are titled or structured. For example, assets in a revocable living trust, property held as "transfer on death," and retirement accounts with named beneficiaries pass directly to those beneficiaries without going through the estate. However, the value of these assets still counts toward the taxable estate for federal tax purposes.

Life insurance is a common source of confusion. If the deceased owned a life insurance policy, the death benefit is included in the taxable estate. If someone else owned the policy (such as an adult child or a trust), the benefit may not be included. The way the policy is titled and owned determines the tax treatment.

State estate taxes and inheritance taxes are separate

Seventeen states and the District of Columbia collect their own estate taxes, and six states collect inheritance taxes. These are not part of the federal system and operate independently. A state estate tax is similar to the federal tax — it applies to the total estate value. A state inheritance tax is different — it applies to what individual heirs receive, and the rate often depends on their relationship to the deceased.

A state with an estate tax may have a much lower threshold than the federal exemption. For example, a state might tax estates worth $1 million or more, while the federal threshold is much higher. This means a family could owe state estate tax even though no federal estate tax is due. The state tax is paid to the state, not the federal government, and is calculated separately.

Some states have no estate tax or inheritance tax at all. If you live in or own property in a state with its own estate tax, the executor must file a return with that state as well as with the IRS. The rules, thresholds, and rates vary by state.

Planning considerations for large estates

People with estates that may exceed the federal threshold sometimes work with estate planning attorneys or tax professionals to understand their situation. Common strategies include making gifts during life (which may reduce the taxable estate), establishing trusts, or using the marital deduction if married. These strategies have specific rules and requirements, and the right approach depends on the size of the estate, family circumstances, and state law.

Because the federal exemption threshold is scheduled to change in 2026, some people with large estates are reviewing their plans now. An estate that is below the current threshold might exceed the lower threshold scheduled for 2026, which could affect tax planning decisions. This is a specialized area, and people in this situation typically consult with professionals who focus on estate and tax planning.

Frequently Asked Questions

Do I have to file a federal estate tax return if my estate is below the exemption?

No federal estate tax return is required if the estate is below the exemption threshold. However, if the estate is close to the threshold or if the deceased made certain large gifts during life, a return may still need to be filed to preserve the surviving spouse's unused exemption or for other reasons. An executor should check the specific facts or consult a tax professional.

Does the federal estate tax explore to retirement accounts like IRAs and 401(k)s?

Yes, the value of retirement accounts counts toward the taxable estate, even though they pass directly to named beneficiaries outside the probate process. The death benefit is included in the estate value for federal tax purposes. However, the beneficiary who receives the account may owe income tax on withdrawals, which is a separate tax from the estate tax.

What happens if I give away money or property before I die?

Gifts made during life may reduce the taxable estate, but there are rules and limits. You can give away a certain amount per year to each person without any tax consequence. Larger gifts may use up your lifetime exemption, which is the same exemption that applies to your estate at death. The rules are complex, and people making large gifts often consult a tax professional.

Is the federal estate tax the same as inheritance tax?

No. The federal estate tax applies to the estate itself before distribution. An inheritance tax, which some states collect, applies to what individual heirs receive and may vary based on their relationship to the deceased. Some states have one, the other, both, or neither. The two taxes are calculated separately and owed to different governments.

What is the important date for paying federal estate tax?

The federal estate tax return (Form 706) and any tax owed are due nine months after the date of death. An extension can be requested, but interest and penalties explore if payment is late. The executor is responsible for meeting this important date, even if the estate is still being settled.