How Much of an Estate Is Tax Free? Exemptions and State Taxes

For someone who dies in 2026, the first $15 million of an estate passes to heirs without any federal estate tax, and a married couple using both spouses’ exemptions can shield up to $30 million combined. That is how much of an estate is tax free at the federal level under the One, Big, Beautiful Bill Act signed on July 4, 2025, which made the higher exemption permanent.¹ State rules are a separate matter: about a dozen states and the District of Columbia impose their own estate or inheritance taxes with exemption floors far below the federal number, so where the deceased lived (or owned property) can pull an otherwise tax-free estate back into taxable territory.

The Federal Exemption in 2026

The basic exclusion amount for 2026 deaths is $15,000,000 per person.¹ It comes from Public Law 119-21, which amended the unified credit under Section 2010 of the Internal Revenue Code.² Beginning in 2027 the amount will adjust annually for inflation, but the $15 million floor is now permanent; the previously scheduled drop back to roughly $5 to $7 million is off the table.

The exemption is unified, meaning it covers both lifetime gifts and transfers at death. Only value above $15 million is taxed, and the top federal rate on the excess is 40%. An estate worth $17 million owes tax on $2 million, not the full amount. The IRS estimates that well under 1% of estates ever exceed the threshold.

The same $15 million also covers the generation-skipping transfer tax, a separate 40% tax on wealth passed to grandchildren or later generations. Estates that leave everything to children can ignore it. Trusts or bequests that skip a generation face the GST tax on amounts above the exemption, on top of any estate tax owed.

How Married Couples Reach $30 Million

Two rules combine to give married couples the most generous treatment in the code. The unlimited marital deduction lets you leave any amount of property to a surviving U.S. citizen spouse with zero federal estate tax at the first death.³ A $50 million estate passing entirely to a surviving spouse triggers no tax at that point. The tax question comes back only when the second spouse dies leaving assets to non-spouse heirs.

Portability is what makes the $30 million figure work. When the first spouse dies without using all of their $15 million exemption, the unused portion (the Deceased Spousal Unused Exclusion, or DSUE) transfers to the survivor. If the first spouse used none of their exemption, the surviving spouse effectively holds a $30 million shield.

Portability is not automatic. The executor of the first spouse’s estate must file Form 706 to claim it, even when no tax is owed and the estate is well under the threshold.⁴ Skip that filing and the unused exemption disappears.

If the Surviving Spouse Is Not a U.S. Citizen

The unlimited marital deduction does not apply when the surviving spouse is not a U.S. citizen.⁵ Property can still pass tax-free, but only through a Qualified Domestic Trust (QDOT). Without one, every dollar above the basic exclusion is taxable at the first death. The deduction can be preserved if the surviving spouse becomes a U.S. citizen before the estate tax return is filed and was a U.S. resident continuously after the death. For lifetime gifts to a non-citizen spouse, the annual exclusion in 2026 is $194,000, well above the standard gift exclusion.⁶

Gifts That Don’t Eat Into the Exemption

Not every gift counts against your $15 million. The annual gift tax exclusion for 2026 is $19,000 per recipient.¹ You can give that much to as many different people as you like each year with no reporting and no reduction in your lifetime exemption. A married couple can combine exclusions to give $38,000 per recipient in a single year.

Gifts above $19,000 to any one person are not immediately taxed. They simply reduce your lifetime exemption, and the donor reports the excess on Form 709.⁷ Actual gift tax comes due only after the full $15 million is used up.

Two categories of gifts sit entirely outside the system with no dollar cap. Tuition paid directly to an educational institution and medical expenses paid directly to the healthcare provider are not treated as taxable gifts at all.⁸ The word “directly” carries the rule. A check to your grandchild to cover tuition counts as a gift; a check to the university does not.

What Comes Off Before the Exemption Applies

The taxable estate is not the total of everything the person owned. Several deductions shrink the number first, so the effective tax-free amount is often larger than $15 million.

Charitable Bequests

Assets left to qualifying charities, religious organizations, educational institutions, or government entities are fully deductible with no cap.⁹ A $20 million estate that gives $6 million to charity has a $14 million taxable estate before the exemption is applied, which means no federal tax.

Debts and Administration Costs

Funeral expenses, legal and appraisal fees, and executor commissions come off the top. So do the deceased person’s outstanding debts: mortgages, credit cards, medical bills, and other legitimate obligations reduce the gross estate dollar for dollar.¹⁰ What qualifies depends on the law of the jurisdiction administering the estate.

Farms and Closely Held Businesses

Families that own a working farm or closely held business may value the real property based on its current use rather than its highest potential market value. The farm or business real estate has to make up at least 25% of the adjusted gross estate, and the decedent or family members must have actively participated in the business for at least five of the eight years before death.¹¹ The property has to pass to a qualifying family heir and stay in its current use. If the heirs sell or convert within 10 years, the tax savings gets clawed back.

Assets People Forget Are in the Estate

Life insurance is the most common surprise. Beneficiaries don’t owe income tax on a death benefit, but if the deceased owned the policy or retained any control at death, the full payout is included in the gross estate for estate tax purposes.¹² A $3 million policy on top of a $14 million estate pushes the total to $17 million and creates a $2 million taxable amount.

The workaround is an irrevocable life insurance trust (ILIT) that owns the policy so you never hold incidents of ownership. Transferring an existing policy to a trust triggers a three-year lookback, so it is not a last-minute move. Other assets that regularly get missed: traditional IRAs and 401(k)s, jointly held property where the deceased contributed most of the funds, and revocable trusts where the deceased retained control.

State Estate and Inheritance Taxes

Roughly a dozen states and the District of Columbia impose their own estate taxes, with exemption thresholds well below the federal $15 million. The lowest state exemptions start around $1 million. An estate that owes nothing federally can still face a six-figure state bill. State rates top out in the range of 12% to 20%, depending on the jurisdiction.

A handful of states use an inheritance tax instead of, or in addition to, an estate tax. Inheritance taxes work differently: the tax falls on the beneficiary based on their relationship to the deceased. Surviving spouses are typically exempt, children and parents often pay little or nothing, and unrelated beneficiaries face the steepest rates. One state imposes both an estate tax and an inheritance tax, which can create a double layer of liability on the same assets.

Owning property in more than one state complicates the picture. Each state may claim the right to tax assets located within its borders regardless of where you lived. State rules also change more often than the federal ones, so the specifics of your state matter.

The Step-Up in Basis Heirs Get Anyway

Even when an estate falls entirely under the exemption, one rule saves families significant money on assets they later sell. When someone inherits an asset, its cost basis resets to the fair market value on the date of the original owner’s death.¹³ Unrealized capital gains that built up during the deceased person’s lifetime disappear for tax purposes.

Consider a parent who bought stock for $50,000 thirty years ago that is worth $500,000 at death. Selling the day before death would have produced $450,000 in taxable gain. The heir who inherits the shares takes a basis of $500,000; selling the next day at that price produces zero taxable gain. The step-up applies to real estate, investments, and most other inherited property, and for many families it saves far more than the estate tax exemption ever will.

When a Return Is Required and When It Is Due

Form 706 is due nine months after the date of death, and any tax owed is due at the same time.⁴ Form 4768 grants an automatic six-month extension to file, but not to pay. The IRS expects at least an estimated payment by the nine-month mark, and missing the deadline triggers late-filing and late-payment penalties unless the executor shows reasonable cause.

Most estates never have to file at all. Form 706 is required only when the gross estate plus adjusted taxable gifts exceeds the basic exclusion amount, $15 million in 2026. The one important exception is portability: an executor who wants to preserve a deceased spouse’s unused exemption for the survivor must file even if the estate is well under the threshold.¹

1
Internal Revenue Service. What’s New — Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
3
Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
4
Internal Revenue Service. Instructions for Form 706 (Rev. September 2025)
5
Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse – Section: (d)
6
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
7
Internal Revenue Service. Instructions for Form 709 (2025) – Section: Who Must File
8
Office of the Law Revision Counsel. 26 US Code 2503 – Taxable Gifts – Section: (e)
9
Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
10
Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes
11
Office of the Law Revision Counsel. 26 USC 2032A – Valuation of Certain Farm, Etc., Real Property
12
Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance
13
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent