To calculate federal estate tax, you value everything the decedent owned at death, subtract allowable deductions to reach the taxable estate, add back reportable lifetime gifts to produce a tentative tax base, apply the graduated rate table (18% to 40%), and then subtract the unified credit tied to the basic exclusion amount. For 2026, that exclusion is $15,000,000 per individual, and the top marginal rate is 40%. If the tax produced by the rate table is less than or equal to the unified credit, the estate owes nothing.
Step 1: Value the Gross Estate
The gross estate is everything the decedent owned or held an interest in at death: real estate, bank accounts, investment portfolios, vehicles, business interests, retirement accounts, and life insurance proceeds where the decedent owned the policy. Each asset is reported at fair market value, meaning the price a willing buyer would pay a willing seller in an open transaction.1Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate
Values are normally measured as of the date of death. The executor may instead elect an alternate valuation date exactly six months later, but only if using that date reduces both the total estate value and the resulting tax. The election is made on the estate tax return and cannot be revoked once filed.2Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
Special Use Valuation for Farms and Closely Held Businesses
If the estate includes a qualifying farm or closely held business, the executor may elect to value that real property based on its current use rather than its highest and best use. For decedents dying in 2026, this election can reduce the property’s reported value by up to $1,460,000.3IRS. Revenue Procedure 2025-32 The property must continue in its qualifying use after death, or the tax savings can be recaptured.4Office of the Law Revision Counsel. 26 USC 2032A – Valuation of Certain Farm, Etc., Real Property
Step 2: Subtract Allowable Deductions
From the gross estate, subtract the costs and obligations the tax code allows. These reach a taxable estate figure.
- Funeral expenses, including burial, cremation, and related services.
- Administration expenses such as legal fees, accounting fees, and executor commissions.
- Debts the decedent owed at death: mortgages, credit card balances, personal loans.
- Legitimate claims against the estate payable from its assets.
Each of these must be allowable under the law of the jurisdiction administering the estate.5Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes Uninsured casualty and theft losses to estate property during settlement are also deductible.6Office of the Law Revision Counsel. 26 USC 2054 – Losses
The Marital and Charitable Deductions
Two deductions are large enough that they often wipe out estate tax entirely. Property passing to a surviving spouse who is a U.S. citizen qualifies for an unlimited marital deduction, with no cap.7Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse Property left to qualifying charitable, religious, scientific, literary, or educational organizations is likewise fully deductible.8Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
The unlimited marital deduction does not apply when the surviving spouse is not a U.S. citizen.7Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse To defer estate tax on assets passing to a non-citizen spouse, the property must be placed in a Qualified Domestic Trust (QDOT). Without one, the estate can only shelter assets up to the decedent’s available exclusion. The 2026 annual gift exclusion for transfers to a non-citizen spouse is $194,000.
Step 3: Add Back Adjusted Taxable Gifts
The federal system taxes lifetime gifts and transfers at death under a single unified structure, so the calculation cannot stop at the taxable estate. Gifts made after 1976 that exceeded the annual exclusion (which is $19,000 per recipient for 2026) and were reported on Form 709 get added back.9Internal Revenue Service. Instructions for Form 709
Adding those adjusted taxable gifts to the taxable estate produces the tentative tax base. Any gift tax the decedent actually paid on those transfers is later credited against the estate tax so that the same dollars are not taxed twice.
Step 4: Apply the Graduated Rate Table
Apply the estate tax rate schedule to the tentative tax base. Rates begin at 18% on the first $10,000 and climb through twelve brackets, reaching 40% on amounts over $1,000,000.10Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax Because the brackets top out at $1,000,000, almost every taxable estate reaches the 40% marginal rate quickly, and the graduated portion mainly affects the first million dollars of the base.
Step 5: Subtract the Unified Credit
The basic exclusion amount works as a dollar-for-dollar credit against the tentative tax. For 2026, the exclusion is $15,000,000 per individual, and the corresponding unified credit is $5,945,800 (the tax the rate table would produce on $15 million).11Internal Revenue Service. What’s New – Estate and Gift Tax The $15,000,000 figure was permanently set by the One Big Beautiful Bill Act, replacing the temporary Tax Cuts and Jobs Act increase that had been scheduled to expire at the end of 2025. Inflation adjustments begin in 2027.12Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
Subtract any prior gift tax the decedent actually paid on lifetime transfers included in the tentative base. What remains is the estate tax owed.
Portability From a Predeceased Spouse
A surviving spouse may add the Deceased Spousal Unused Exclusion (DSUE) from the most recently deceased spouse to their own exclusion. If the first spouse died with a taxable estate of $6 million against a $15 million exclusion, $9 million in unused exclusion can move to the survivor, potentially producing $24 million of shelter at the second death.
Portability is not automatic. The executor of the first-to-die spouse must file a complete Form 706 and make the election, even when the estate is far below the filing threshold.13Internal Revenue Service. Instructions for Form 706 Missing the election means the unused exclusion is lost. Estates below the filing threshold can use a simplified late-election process by filing a complete Form 706 within five years of death, referencing Revenue Procedure 2022-32.14Internal Revenue Service. Frequently Asked Questions on Estate Taxes Only the DSUE from the most recently deceased spouse counts; remarriage and a second spouse’s death replace any earlier DSUE.
A Worked Example for 2026
Assume a tentative tax base of $17,000,000, with no prior gift tax paid and no DSUE.
- Tentative tax on $17,000,000: $345,800 plus 40% of the amount over $1,000,000. That is $345,800 + $6,400,000 = $6,745,800.
- Subtract the unified credit: $6,745,800 − $5,945,800 = $800,000.
- Estate tax owed: $800,000.
The $2,000,000 above the $15 million exclusion is effectively taxed at 40%, producing the $800,000 liability.10Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
Two Taxes the Calculation Above Does Not Cover
The steps above produce only the ordinary federal estate tax. Two other transfer taxes can add to what the estate owes.
Generation-skipping transfer (GST) tax. Transfers that skip a generation, such as a bequest directly to a grandchild, can trigger a separate GST tax at a flat 40% on top of the estate tax. The lifetime GST exemption for 2026 matches the estate tax exclusion at $15,000,000, but the GST exemption is not portable between spouses; any exemption unused at death is lost.11Internal Revenue Service. What’s New – Estate and Gift Tax
State estate and inheritance taxes. Roughly 18 states impose their own estate or inheritance tax, and state exemption thresholds range from about $1 million to over $13 million. An estate can owe nothing federally and still face significant state tax. If the decedent lived in or owned property in one of those states, run the state calculation separately.
Where the Number Goes
The estate reports the calculation on IRS Form 706, due within nine months of the date of death. Filing Form 4768 before that deadline grants an automatic six-month extension to file, but not to pay; any estimated tax remains due at the nine-month mark.14Internal Revenue Service. Frequently Asked Questions on Estate Taxes A return is also required to preserve portability even when no tax is owed.