The federal estate tax applies only to estates worth more than $15 million per person in 2026, so the overwhelming majority of families owe nothing at the federal level. For the portion of an estate above that exclusion, the top federal rate is 40%. About a dozen states and the District of Columbia impose their own estate or inheritance taxes with far lower thresholds, and those catch estates that clear the federal bar with room to spare.
The 2026 Exclusion Amount
For anyone who dies in 2026, the basic exclusion is exactly $15 million.1Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax If the total value of everything the person owned stays below that figure, the estate owes no federal estate tax and generally doesn’t need to file a return.
The $15 million figure was locked in by the One, Big, Beautiful Bill signed into law on July 4, 2025. The 2017 Tax Cuts and Jobs Act had temporarily roughly doubled the exclusion from about $5.5 million to over $11 million, but that increase was scheduled to expire on January 1, 2026. The new law made the higher exclusion permanent and bumped it further, from the 2025 level of $13.99 million to a flat $15 million.2Internal Revenue Service. What’s New – Estate and Gift Tax Starting in 2027, the amount will be adjusted annually for inflation.1Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
The rate schedule is graduated, but because the exclusion already shelters the first $15 million, every taxable dollar above that amount reaches the steep brackets quickly, topping out at 40%.
What Counts in the Estate
The gross estate includes the fair market value of virtually everything the deceased person owned or held an interest in at the moment of death. Real estate, bank accounts, investment portfolios, retirement accounts, and personal property such as vehicles and jewelry all count. Business interests, whether sole proprietorships, partnership stakes, or corporate shares, need professional appraisal.3Internal Revenue Service. Instructions for Form 706 – United States Estate and Generation-Skipping Transfer Tax Return
Life insurance proceeds are included if the deceased person held any control over the policy, such as the ability to change beneficiaries, borrow against the cash value, or cancel it. Transferring ownership of a policy to an irrevocable trust at least three years before death is a common strategy to keep those proceeds out of the taxable estate.
Digital assets follow the same rules. Cryptocurrency, NFTs, and other blockchain-based property are treated as property for federal tax purposes and valued at fair market value on the date of death.4Internal Revenue Service. Digital Assets If the deceased held assets across multiple wallets or exchanges, pulling together accurate valuations takes real detective work.
Deductions That Shrink the Taxable Estate
The gross estate is only the starting point. Federal law allows several deductions that can dramatically reduce the taxable amount. Funeral costs, legal fees, executor commissions, and other expenses of settling the estate are deductible, along with debts the deceased owed, such as mortgages, credit card balances, and outstanding medical bills.5Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes
Two deductions do the heaviest lifting. The marital deduction allows everything passing to a surviving spouse to transfer free of estate tax, with no dollar limit.6Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse This doesn’t eliminate the tax so much as defer it: when the surviving spouse later dies, everything they own is measured against their own exclusion. The charitable deduction works similarly. Property left directly to a qualifying charity is fully deductible from the estate.
After subtracting all allowable deductions from the gross estate, the remainder is the taxable estate. If that figure is below $15 million, no federal tax is owed.
Lifetime Gifts Count Too
The federal government treats lifetime gifts and transfers at death as a single system. The same $15 million exclusion covers both, and every dollar of taxable gifts you make during your life reduces the amount of exclusion left for your estate. The IRS calls this the unified credit, and it means you can’t give away $15 million during life and then also shelter $15 million at death.7Internal Revenue Service. Estate and Gift Tax FAQs
The annual gift tax exclusion is a separate safety valve. In 2026, you can give up to $19,000 per recipient without it counting against your lifetime exclusion at all.2Internal Revenue Service. What’s New – Estate and Gift Tax A married couple giving jointly can double that to $38,000 per recipient. These annual gifts are the simplest way to move wealth out of a taxable estate over time.
Some people made large gifts between 2018 and 2025 when the exclusion was temporarily doubled. The IRS issued regulations confirming that those gifts won’t be clawed back if the exclusion later drops. The estate tax credit is calculated using whichever is higher: the exclusion when the gift was made or the exclusion at the date of death.7Internal Revenue Service. Estate and Gift Tax FAQs Because the new $15 million permanent exclusion exceeds all prior levels, this protection is now largely academic.
Portability Between Spouses
When the first spouse in a married couple dies, any unused portion of their $15 million exclusion can transfer to the survivor. This is called portability, and it can effectively double the surviving spouse’s exemption to $30 million. But portability is not automatic. The executor must affirmatively elect it by filing a federal estate tax return (Form 706), even when the estate is far too small to owe any tax.2Internal Revenue Service. What’s New – Estate and Gift Tax
This is where a lot of families leave money on the table. If the first spouse dies with an estate well below $15 million and nobody files Form 706, the unused exclusion simply vanishes. The surviving spouse is then stuck with only their own $15 million exemption. For estates that are growing, or when both spouses have substantial separate assets, skipping this step can cost millions in taxes at the second death.
When no return was otherwise required, the executor has up to five years from the date of death to file a late portability election under simplified IRS procedures. The Form 706 must include a statement at the top that it is being filed under Revenue Procedure 2022-32 to elect portability.8Internal Revenue Service. Revenue Procedure 2022-32 After five years, the opportunity is gone.
State Estate and Inheritance Taxes
Clearing the federal threshold doesn’t mean the estate owes nothing. About a dozen states and the District of Columbia impose their own estate taxes, and these apply at much lower thresholds than the federal $15 million. The lowest state exemptions start around $1 million, meaning an estate worth $2 million could owe nothing federally but face a five- or six-figure state tax bill. A few states tie their exemptions close to the federal level.
State estate tax rates are graduated, with top rates reaching as high as 20% in a couple of jurisdictions. Most top out somewhere between about 10% and 16%. A separate group of about five states imposes inheritance taxes instead, which are calculated based on what each individual heir receives rather than the total estate value. One jurisdiction imposes both. The distinction matters. With an estate tax, the estate itself pays before anything is distributed. With an inheritance tax, the burden falls on the recipient and often depends on how closely related they are to the deceased: spouses and direct descendants typically pay little or nothing, while more distant relatives and unrelated heirs face higher rates.
State tax rules vary significantly and change frequently. Checking with the tax authority in the state where the deceased was domiciled is essential, and estates with property in multiple states may need to file in more than one.
Filing Form 706 and the Nine-Month Deadline
The federal estate tax return is IRS Form 706, and it is due within nine months of the date of death. The return requires detailed documentation of every asset and its value, every deduction claimed, and a list of all beneficiaries. Real estate and valuable personal property (particularly art and collectibles worth more than $3,000 per item) must be supported by professional appraisals reflecting fair market value on the date of death. For life insurance, the executor needs Form 712 from each insurance company to confirm the death benefit amount.3Internal Revenue Service. Instructions for Form 706 – United States Estate and Generation-Skipping Transfer Tax Return
If the executor needs more time to gather appraisals or finalize the return, Form 4768 provides an automatic six-month extension to file. That same form can request additional time to pay, but the payment extension is not automatic. The executor must explain why paying on time is impossible or impractical, and the IRS grants it at its discretion for up to one year at a time, with a maximum of ten years.9Internal Revenue Service. Instructions for Form 4768 – Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes Filing extensions happen essentially for the asking; payment extensions require genuine hardship.
What Heirs Get: Step-Up in Basis
When someone inherits property, they generally receive it with a tax basis equal to the fair market value at the date of death, rather than whatever the deceased originally paid. This is called a step-up in basis, and it can save heirs enormous amounts in capital gains tax when they eventually sell.10Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
If your parent bought a home for $200,000 and it was worth $800,000 at death, your basis is $800,000. Sell it for $810,000 and you owe capital gains tax on only $10,000, not the $610,000 of total appreciation. The rule applies to stocks, real estate, and most other inherited assets.
The basis reported on the estate tax return sets a ceiling. An heir cannot claim a basis higher than the value reported to the IRS for estate tax purposes.10Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Executors who undervalue assets to reduce the estate tax may inadvertently create a larger capital gains bill for the people who inherit them.
Penalties for Late Filing and Undervaluation
Missing the filing deadline triggers a penalty of 5% of the unpaid tax for each month the return is late, up to a maximum of 25%. The failure-to-pay penalty is lighter at 0.5% per month, also capped at 25%, but it runs separately and interest compounds on top of both.11Office of the Law Revision Counsel. 26 U.S. Code 6651 – Failure to File Tax Return or to Pay Tax Filing late and paying late at the same time means the penalties stack, and the math gets ugly fast on a large balance.
Undervaluing assets creates its own penalty exposure. If the IRS determines that an estate significantly understated the value of property, a 20% accuracy-related penalty applies to the underpayment caused by the misstatement. For a gross undervaluation, where the reported value is 40% or less of the correct value, the penalty doubles to 40%.12Internal Revenue Service. The Section 6662(e) Substantial and Gross Valuation Misstatement Penalty Qualified appraisals from credentialed professionals give the executor a defensible position if the IRS challenges a valuation. Informal estimates invite scrutiny.