The federal estate tax applies only to estates worth more than $15 million per person for deaths in 2026, and only the amount above that exemption is taxed, at a flat 40% rate.1Internal Revenue Service. What’s New — Estate and Gift Tax A married couple who plans properly can shield up to $30 million combined. For the overwhelming majority of families, no federal estate tax is owed and no return has to be filed. If your estate is anywhere near the threshold, though, the details of what counts, what gets deducted, and what has to be filed on time are where real money is won or lost.
The 2026 Exemption and Where It Came From
Every U.S. citizen or resident gets a lifetime exemption that covers both gifts made while alive and property transferred at death. For 2026, that exemption is $15 million per person, or $30 million for a married couple where both spouses are U.S. citizens.2Internal Revenue Service. Frequently Asked Questions on Estate Taxes Only the portion of an estate exceeding the exemption triggers federal tax.
The $15 million figure replaced the previous exemption of $13.99 million. Under the Tax Cuts and Jobs Act of 2017, the exemption had been scheduled to drop back to roughly half its value in 2026, but the One, Big, Beautiful Bill Act, signed on July 4, 2025, eliminated that sunset.1Internal Revenue Service. What’s New — Estate and Gift Tax The new level has no expiration date and will receive annual inflation adjustments beginning in 2027.
Because the exemption is a unified credit, it offsets both gift tax and estate tax over your lifetime. If you gave $3 million in taxable gifts before death, your remaining exemption at death would be $12 million.3Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax You cannot claim it twice.
What Counts Toward Your Estate
The gross estate includes virtually everything you own or have a financial interest in at the time of death, valued at fair market value on that date.4Office of the Law Revision Counsel. 26 U.S. Code 2031 – Definition of Gross Estate Fair market value is the price a willing buyer and willing seller would agree to, not what you originally paid. Real estate, bank accounts, investment portfolios, retirement accounts, business interests, and personal property all count.5Internal Revenue Service. Estate Tax
Life insurance is where families get caught off guard. If you held any ownership rights over a life insurance policy at death, the full payout goes into your gross estate, even though the money is paid directly to the named beneficiary.6Office of the Law Revision Counsel. 26 U.S.C. 2042 – Proceeds of Life Insurance A $2 million policy owned by someone with $14 million in other assets pushes the total to $16 million and over the exemption line. Transferring policy ownership to an irrevocable trust at least three years before death is a common way to keep the proceeds out of the estate.
Deductions That Reduce the Taxable Estate
The taxable estate is not the same as the gross estate. Several deductions can shrink the number you compare against the $15 million threshold, and in many cases they eliminate the tax entirely.
The marital deduction is the most powerful. Property that passes to a surviving spouse who is a U.S. citizen is fully deductible with no dollar limit.7Office of the Law Revision Counsel. 26 U.S.C. 2056 – Bequests to Surviving Spouse A $50 million estate left entirely to a surviving spouse would owe zero federal estate tax at that death. Those assets then become part of the surviving spouse’s estate later, so the marital deduction defers the tax rather than permanently eliminating it.
Charitable contributions made through the estate are fully deductible. The law also allows the estate to subtract funeral costs, administration expenses like attorney and accountant fees, outstanding debts, and unpaid mortgages.8Office of the Law Revision Counsel. 26 U.S.C. 2053 – Expenses, Indebtedness, and Taxes All of these come off the gross estate before you compare the result to the exemption.
How the 40% Rate Actually Applies
The rate schedule is technically graduated, running from 18% to 40%. In practice, though, the $15 million exemption works as a credit that wipes out all the tax at the lower brackets, so every dollar above the exemption is effectively taxed at a flat 40%.9Congress.gov. The Estate and Gift Tax: An Overview
The mechanics: the IRS computes a tentative tax on the entire taxable estate using the graduated schedule, then subtracts the unified credit, which equals the tax that would be owed on $15 million run through those same brackets.10Office of the Law Revision Counsel. 26 U.S.C. 2001 – Imposition and Rate of Tax Everything below $15 million nets to zero. Everything above sits in the top bracket. For a $17 million taxable estate, the federal tax comes out to roughly $800,000, which is 40% of the $2 million over the exemption.
Portability: Don’t Waste the First Spouse’s Exemption
When the first spouse dies, any unused portion of their $15 million exemption can transfer to the surviving spouse through a mechanism called portability. If the first spouse’s estate used only $4 million of exemption, the surviving spouse can carry the remaining $11 million forward and add it to their own $15 million, for a combined shield of $26 million.3Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
Portability is not automatic. The executor of the first spouse’s estate must file Form 706 and make the portability election, even if the estate is too small to owe any tax.11Internal Revenue Service. Instructions for Form 706 Skip the filing and the deceased spouse’s unused exemption disappears permanently.
The standard deadline for filing Form 706 to elect portability is nine months after death. Estates that are not otherwise required to file can use a simplified extension procedure giving up to five years from the date of death, as long as the return includes a specific statement referencing Revenue Procedure 2022-32.11Internal Revenue Service. Instructions for Form 706 Even when no tax is due, filing is almost always worth the cost because it preserves millions in future protection.
When Form 706 Has to Be Filed
An estate must file Form 706 if the decedent was a U.S. citizen or resident and the gross estate plus adjusted taxable gifts made during life exceeds $15 million for deaths in 2026.2Internal Revenue Service. Frequently Asked Questions on Estate Taxes The return and any tax owed are due nine months after the date of death.12Internal Revenue Service. Filing Estate and Gift Tax Returns
An executor who needs more time can request a six-month extension before the nine-month deadline. The extension covers filing the return; it does not extend the time to pay. Estimated tax still has to be paid by the original nine-month date to avoid interest and penalties.12Internal Revenue Service. Filing Estate and Gift Tax Returns
Penalties for Missing the Deadline or Undervaluing Assets
Filing late triggers a penalty of 5% of the unpaid tax for each month or partial month the return is overdue, capped at 25%.13Internal Revenue Service. Failure to File Penalty A separate failure-to-pay penalty adds 0.5% per month on the unpaid balance, also capped at 25%. When both apply, the filing penalty is reduced by the payment penalty amount, so they do not fully stack during the first five months.
Valuation is a second exposure. If the IRS determines that estate assets were undervalued, it can impose an accuracy-related penalty of 20% on the underpayment tied to the understatement.14Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments Professional appraisals for real estate, closely held business interests, and other hard-to-value assets are the standard defense.
The Annual Gift Exclusion
Separate from the lifetime exemption, you can give up to $19,000 per recipient per year in 2026 without using any of your $15 million exemption or filing a gift tax return.15Internal Revenue Service. Gifts and Inheritances A married couple can give $38,000 per recipient by gift-splitting. These annual gifts sit entirely outside the estate tax system and steadily reduce the size of your eventual estate, which makes them one of the simplest planning moves available.
Gifts above $19,000 to a single recipient in one year are not immediately taxed. The excess counts against your $15 million lifetime exemption instead. Actual gift tax at the 40% rate only kicks in after you have used the exemption up entirely.
State Estate and Inheritance Taxes Are Separate
The $15 million federal exemption controls only the federal tax. Twelve states and the District of Columbia impose their own estate taxes, and the exemption thresholds there are far lower than the federal level. Some start as low as $1 million, so an estate that owes nothing federally can still face a significant state bill. State estate tax top rates range from roughly 12% to 20% depending on the jurisdiction.
Five states also impose an inheritance tax, which works differently. It is paid by each beneficiary based on the amount received and the beneficiary’s relationship to the deceased. Spouses and children typically pay lower rates or are exempt; more distant relatives and unrelated beneficiaries pay more. In a few states, an estate can be subject to both an estate tax and an inheritance tax.
Anyone with property or legal residence in one of these states should factor the state rules into their planning. The federal exemption offers no protection against them.