Inheritance Tax Threshold: Federal, State, and Spouse Rules

There is no federal inheritance tax, and the federal estate tax only kicks in on estates worth more than $15 million per person in 2026. The inheritance tax threshold that might actually affect you is set at the state level: five states tax what individual beneficiaries receive, with exemptions and rates that turn on your relationship to the person who died, and about a dozen more states impose their own estate tax with cutoffs that can start as low as $1 million. Whether anything is owed depends on where the deceased lived, where they owned property, and who is inheriting.

Federal Estate Tax Threshold in 2026

The One, Big, Beautiful Bill Act, signed on July 4, 2025, permanently set the federal basic exclusion amount at $15 million per person for anyone who dies after December 31, 2025.¹ Starting in 2027, that $15 million figure will be adjusted annually for inflation.² The earlier scheduled drop to roughly $7 million no longer applies.

Only the amount above $15 million is taxed, and the graduated rate tops out at 40 percent.³ A single person who dies in 2026 leaving a $17 million estate owes federal estate tax on $2 million, not on the full $17 million.

Portability Doubles the Threshold for Married Couples

When a married person dies without using their full $15 million exemption, the surviving spouse can claim what’s left. This “deceased spousal unused exclusion,” or portability, lets a couple who plans correctly shelter up to $30 million from federal estate tax.⁴

Portability is not automatic. The executor of the first spouse’s estate has to file a complete Form 706 within nine months of death (or 15 months with an extension), even if no tax is owed.⁵ If that filing is skipped, the unused exemption is lost. A simplified late-election procedure allows filing up to five years after death, with a specific notation referencing Revenue Procedure 2022-32.⁴

The Unlimited Marital Deduction

Anything a spouse who is a U.S. citizen inherits passes free of federal estate tax, regardless of amount.⁶ The tax is only triggered when the surviving spouse later dies and the combined wealth passes to other heirs. This deduction is separate from portability and does not depend on filing anything to preserve it.

Estate Tax and Inheritance Tax Are Not the Same

The two terms get used interchangeably, but they work differently, and the difference decides who pays. An estate tax comes out of the deceased person’s assets before anything is distributed. An inheritance tax is paid by each beneficiary based on what that person receives and how they were related to the deceased.

The federal government imposes only an estate tax. Inheritance taxes exist only at the state level. Some states have one, some have the other, and Maryland has both.

States That Impose an Inheritance Tax

Five states currently levy an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa fully repealed its inheritance tax for deaths on or after January 1, 2025.

Unlike the federal $15 million threshold, which applies to the whole estate, inheritance tax thresholds are set per beneficiary and depend on relationship. Surviving spouses are exempt in every state that imposes the tax. Children, parents, grandchildren, and often siblings either pay nothing or pay low rates against relatively generous exemptions. Distant relatives and unrelated beneficiaries face much smaller exemptions and much higher rates. In some states the exemption for a friend or non-family beneficiary can be as low as $500, with rates reaching up to 16 percent.

Nebraska’s inheritance tax is administered at the county level through the county treasurer rather than by a state tax agency, and the county court issues an order determining what is owed. In every inheritance tax state, it is the beneficiary’s share, not the size of the estate, that decides whether tax is due.

How Beneficiary Classes Work

States group beneficiaries into classes based on their relationship to the deceased. The labels vary, but the structure is consistent.

Closest relatives (often called Class A) typically include the surviving spouse, children, grandchildren, and parents. They are either fully exempt or taxed at the lowest rates against the highest exemption amounts.
Extended family (often called Class B) usually covers siblings, nieces, nephews, sons-in-law, and daughters-in-law. Exemptions are smaller and rates are higher.
Everyone else (often called Class C) includes distant relatives, friends, and unrelated individuals. Exemptions can be just a few hundred dollars, and rates reach up to 16 percent in some states.

Class boundaries differ. In some states siblings sit with children in the most favorable class; in others they don’t. Check the rules of the state where the deceased lived, because your relationship, not the dollar amount, is the main variable.

States That Impose Their Own Estate Tax

Roughly a dozen states and the District of Columbia impose an estate tax that is separate from both the federal estate tax and any inheritance tax. State thresholds are often far below the federal $15 million exemption, ranging from about $1 million up to figures that approach or match the federal number.

An estate that owes nothing federally can still owe state estate tax. A $3 million estate is well under the federal threshold but could trigger tax in several states. The state where the deceased lived controls, and if the deceased owned real estate in a state that has its own estate tax, that state can tax the property inside its borders even if the deceased lived elsewhere.

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

The unlimited marital deduction does not apply if the surviving spouse is not a U.S. citizen.⁶ Without it, the whole estate could be exposed to federal estate tax at the first death. To keep the deduction, the estate has to transfer assets into a qualified domestic trust, or QDOT.⁷

A QDOT must have at least one U.S. citizen trustee or a domestic corporation as trustee. Any distribution of principal triggers estate tax at that point, as if the amount had been in the deceased spouse’s estate. If the non-citizen spouse becomes a U.S. citizen before the estate tax return is due (generally nine months after death), the standard marital deduction applies and no QDOT is needed.

For lifetime gifts, a U.S. citizen can give up to $194,000 in 2026 to a non-citizen spouse without triggering gift tax, well above the $19,000 annual exclusion that applies to other individuals.²

Lifetime Gifts Eat Into the Federal Threshold

The federal estate tax exemption and the gift tax exemption are unified and share the same $15 million lifetime cap. Taxable gifts you make during your life reduce what’s available at death. Use $3 million on lifetime gifts and only $12 million is left to shelter your estate.

The annual gift tax exclusion is a separate track. You can give up to $19,000 per recipient in 2026 without using any of your lifetime exemption.² A married couple can combine to give $38,000 per recipient per year. Only amounts above $19,000 per recipient in a given year draw down the lifetime exemption.

What Counts Toward the Threshold

Whether an estate crosses any threshold depends on the fair market value of everything the deceased owned: real estate, vehicles, bank accounts, investments, retirement accounts, life insurance proceeds, and business interests. Fair market value is the price a willing buyer and willing seller would agree on.

The default valuation date is the date of death. The executor can elect an alternate valuation date six months after death, but only when values have declined; it cannot be elected if it would raise the estate’s total.⁸ Any assets sold or distributed during that six-month window are valued as of the sale or distribution date.

The gross value is not the number the tax runs on. Several deductions reduce the taxable estate:⁹

Funeral expenses, including burial and cremation costs.
Administration expenses such as attorney, executor, accounting, and appraisal fees.
Debts, including outstanding mortgages, credit card balances, and medical bills.
Charitable bequests to qualifying organizations, which are fully deductible.¹⁰
Property passing to a surviving U.S. citizen spouse under the marital deduction.

These can pull an estate under a threshold. A $16 million gross estate might fall below the $15 million federal exemption once debts, funeral costs, and administration expenses are subtracted.

Filing When the Estate Is Under the Threshold

An estate can be well below $15 million and still have a reason to file federally. The main one is the portability election: if the surviving spouse wants to preserve the deceased spouse’s unused exemption, Form 706 has to be filed.⁵ No filing, no preserved exemption.

At the state level, some states require an inheritance tax waiver or a consent-to-transfer form before banks, brokerages, or title companies will release assets to beneficiaries, even when nothing is owed. Without those documents, real estate titles and account funds can sit in limbo. Requirements vary, so the executor should contact the relevant state tax agency early.

1
Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
3
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
4
Internal Revenue Service. Frequently Asked Questions on Estate Taxes
5
Internal Revenue Service. Instructions for Form 706
6
Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
7
Office of the Law Revision Counsel. 26 USC 2056A – Qualified Domestic Trust
8
Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
9
Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes
10
Internal Revenue Service. Estate Tax