Calculating the taxable estate is a three-step exercise: total the fair market value of everything the deceased owned (the gross estate), subtract the deductions the law allows, and compare the result to the federal exclusion. For deaths in 2026, only the amount above $15,000,000 is subject to federal estate tax, and the tax on that excess runs from 18% up to 40%.1Internal Revenue Service. What’s New – Estate and Gift Tax The tax is owed by the estate itself, not by the heirs, and it is reported on a separate return from the deceased person’s final income tax filing.
Step One: Add Up the Gross Estate
The gross estate captures the fair market value of everything the deceased owned or had a financial interest in at death.2Office of the Law Revision Counsel. 26 USC 2033 – Property in Which the Decedent Had an Interest The starting figure is deliberately broad. You will narrow it down with deductions later; for now, the job is to leave nothing out.
What Gets Included
Real property, stocks, bonds, mutual funds, and cash accounts form the core. Personal property counts too: vehicles, jewelry, collectibles, and artwork are valued at what a willing buyer would pay on the open market.3Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate Business interests, retirement accounts, and amounts owed to the deceased round out the list.
Three categories often catch families off guard:
Life insurance. If the deceased held “incidents of ownership” in the policy, meaning the power to change beneficiaries, cancel coverage, or borrow against the cash value, the full death benefit counts as part of the gross estate.4Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance The payout going straight to a named beneficiary does not remove it from the calculation.
Jointly held property. With joint tenancy, the default rule assumes the deceased owned the whole property unless the surviving co-owner can prove they paid for part of it with their own money.5Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests Married couples get a simpler rule: when spouses are the only joint owners, exactly half the value goes into the deceased spouse’s gross estate, regardless of who paid.
Recent transfers. Certain transfers made within three years of death, most notably the transfer of a life insurance policy, get added back to the gross estate.6Office of the Law Revision Counsel. 26 USC 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death Assets held in revocable trusts also stay in the gross estate, because the deceased kept the power to take them back.
How Each Asset Is Valued
Every asset is valued at fair market value on the date of death. For publicly traded stocks and bonds, that means the average of the highest and lowest selling prices on the valuation date.7Internal Revenue Service. Instructions for Form 706 (Rev. September 2025) Real estate, closely held businesses, and personal property like art or jewelry generally require a professional appraisal.8Internal Revenue Service. Publication 561 – Determining the Value of Donated Property
If asset values drop after the date of death, the executor can elect an alternate valuation date exactly six months later.9Internal Revenue Service. Revenue Procedure 98-34 Anything sold or distributed inside those six months is valued as of the date it left the estate. The election is all-or-nothing: it applies to every asset, not a chosen few.
Step Two: Subtract the Deductions
The taxable estate is what remains after allowable deductions come off the gross estate. This is where most of the number-crunching happens, and where documentation matters most.
Debts, Expenses, and Losses
Funeral costs, probate attorney fees, executor commissions, and accounting expenses come off the top.10Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes So do legitimate debts the deceased owed at death: medical bills, credit card balances, personal loans, and unpaid mortgages on property already included in the gross estate at full value. Every deduction needs support in the form of invoices, loan statements, or receipts; the IRS disallows deductions that lack it.
If estate property is damaged by fire, storm, or theft during the settlement period and insurance does not cover it, the uncompensated loss is deductible.11Office of the Law Revision Counsel. 26 USC 2054 – Losses
Estate, inheritance, or succession taxes actually paid to a state or the District of Columbia on this same estate are also deductible.12Office of the Law Revision Counsel. 26 USC 2058 – State Death Taxes
The Marital Deduction
Assets passing to a surviving spouse who is a U.S. citizen are fully deductible with no dollar limit.10Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes The tax is not erased; it is deferred until the surviving spouse dies. Used fully, the marital deduction can wipe the taxable estate down to zero at the first death.
If the surviving spouse is not a U.S. citizen, the unlimited marital deduction is not available unless the assets pass through a qualified domestic trust (QDOT).13Office of the Law Revision Counsel. 26 USC 2056A – Qualified Domestic Trust The QDOT must have at least one U.S. citizen or domestic corporation as trustee with the power to withhold estate tax on distributions of principal. If the surviving spouse later becomes a citizen while residing in the country, these restrictions fall away.
The Charitable Deduction
Assets left to qualifying charities, religious organizations, or governmental bodies for public purposes are fully deductible with no cap.14Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses An estate that leaves everything to charity owes zero federal estate tax.
Step Three: Apply the Exclusion and Compute the Tax
For deaths in 2026, the basic exclusion amount is $15,000,000.1Internal Revenue Service. What’s New – Estate and Gift Tax That figure was set by the One, Big, Beautiful Bill Act signed into law on July 4, 2025, raising it from the 2025 level of $13,990,000. The IRS adjusts it annually for inflation.
The exclusion works through the unified credit, which zeroes out the tax on the first $15,000,000 of the taxable amount. It is “unified” because it tracks lifetime taxable gifts alongside transfers at death. If the deceased made $3,000,000 in taxable gifts during their lifetime, only $12,000,000 of the exclusion is left to shield the estate.
If the taxable estate falls under $15,000,000 after deductions and prior gifts, no federal estate tax is due. Most American households never come close.
How the Rates Actually Apply
The estate tax uses a graduated schedule with 12 brackets, starting at 18% and topping out at 40% on amounts over $1,000,000.15Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax In practice the schedule is misleading. The tax is computed on the full taxable amount, and the unified credit then offsets the tax attributable to the first $15,000,000. Because the exclusion itself is far above the $1,000,000 threshold where the 40% rate kicks in, every dollar of taxable estate above $15,000,000 is effectively taxed at 40%. The lower brackets matter only for estates so close to the exclusion line that the excess falls below $1,000,000.
A worked example makes this concrete. Say someone dies in 2026 with a taxable estate of $17,000,000 and no prior taxable gifts. The tentative tax is calculated on the full $17,000,000. The unified credit removes the tax on the first $15,000,000. The remaining $2,000,000 is taxed at 40%, producing a bill of roughly $800,000.
Portability: Why a Small First Estate Should Still File
Portability lets a surviving spouse inherit whatever portion of the deceased spouse’s exclusion went unused.16Internal Revenue Service. Instructions for Form 706 – United States Estate (and Generation-Skipping Transfer) Tax Return – Section: Part VI Portability of Deceased Spousal Unused Exclusion (DSUE) If the first spouse to die had a taxable estate of $5,000,000 in 2026, $10,000,000 of exclusion goes unused. The survivor can add that to their own $15,000,000, sheltering up to $25,000,000 at the second death.
Portability is not automatic. The executor of the first estate must file a timely Form 706 and affirmatively elect portability, even if the estate owes no tax. Skipping the return forfeits the unused exclusion permanently. For families whose first estate looks too small to bother with, this is often the most expensive oversight in estate planning.
Filing Deadline and What Late Costs
Form 706 is due nine months after the date of death. Executors who need more time can file Form 4768 for an automatic six-month extension, but the request has to be in before the original deadline passes.17eCFR. 26 CFR 20.6081-1 – Extension of Time for Filing the Return An extension to file is not an extension to pay. Interest runs on any unpaid balance from the original due date.
Extensions to pay are separate and harder to get. The executor must show reasonable cause, such as assets tied up in litigation, locked in illiquid investments, or scattered across jurisdictions.18eCFR. 26 CFR 20.6161-1 – Extension of Time for Paying Tax Shown on the Return A reasonable-cause extension can run up to 12 months. If the estate can show undue hardship (forced liquidation at fire-sale prices), the IRS can grant extensions totaling up to 10 years. Inconvenience does not qualify.
Missing the deadline is expensive. The failure-to-file penalty is 5% of the unpaid tax per month, capped at 25%.19Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax A separate failure-to-pay penalty of 0.5% per month runs alongside it, also capped at 25%. Interest is layered on top. An estate that owes $2,000,000 and misses the deadline by five months faces $500,000 in failure-to-file penalties, another $50,000 in failure-to-pay penalties, and interest besides.
Two Things the Federal Calculation Does Not Cover
State taxes. Roughly a dozen states and the District of Columbia impose their own estate taxes, and several use exemption thresholds far below the federal $15,000,000, sometimes as low as $1,000,000 or $2,000,000. A handful of states also levy inheritance taxes, which are paid by the person receiving the assets rather than by the estate, with rates that depend on the beneficiary’s relationship to the deceased. State death taxes actually paid are deductible on the federal return,12Office of the Law Revision Counsel. 26 USC 2058 – State Death Taxes but state returns are filed separately and often on different timelines.
Generation-skipping transfers. Wealth passing to grandchildren or others more than one generation below the deceased can trigger a separate generation-skipping transfer (GST) tax at a flat 40%, on top of any estate tax. A separate GST exemption, also $15,000,000 for 2026, shields transfers up to that amount and is allocated on Form 706.1Internal Revenue Service. What’s New – Estate and Gift Tax Trusts benefiting multiple generations need this allocation planned carefully.